Value management in process control upgrade projects
Value Management is a comprehensive term covering Value Engineering (VE), Value Analysis (VA) and Constructability Analysis (CA). Value Engineering is a “pro-active” approach done during the scope development / design phase, whereas Value Analysis is a “reactive” approach of reviewing a partially completed or completed design to determine if it could be improved to better meet the cost or other objectives. Constructability Analysis uses construction knowledge and experience to make the design more constructible.
Globally, plant upgrades are very common in Oil, Gas, Petrochemical and Power sectors. Most of these are for enhancing production or utilities capacities; improving plant performance levels; or increasing the automation level. This paper focuses on the upgrades for improving automation level for process control systems. Major investments are ongoing and more are likely to come up in this area with leading companies in Oil & Gas, Power and Petrochemical sectors.
These Upgrade Projects are unique in nature with ambiguous project scope elements and many hidden risks. Moreover, today's projects are more global and complex. Customers demand speed and quality together, because the timing affects their business operations. Therefore, Value Management methodology needs to be carefully applied at each stage of the project life cycle. If the project team does not know where it is going, any road will get them there.
Value Management practiced jointly by the client and contractor can effectively improve the returns from these projects, for both parties. All major elements of the project life cycle are discussed in this paper to effectively implement the Value Methodology, and there by ensuring best value for each Dollar spent.
Best practices of value management methodologies are easier said than done. Tremendous efforts are required to achieve best results from Value management methodologies. However, it is well worth every drop of sweat, every moment of frustration and every minute of training it requires. Until few years ago companies were ranked high if they delivered right or best quality. Global competitiveness is moving up almost on a daily basis, that companies have replaced the concept of “Quality” by “Value”.
This paper discusses the application of Value management methodologies for process control upgrade projects. Most of these are for enhancing production or utilities capacities; improving plant performance levels; or increasing the automation level. In many situations, these upgrades give enhanced plant operating capacity at a comparatively low project cost and a reduced operating cost. It also provides an effective tool towards preventive/predictive maintenance program and in most of the cases allows downsizing the overall manpower, per unit production.
What is Value?
Both client and contractor must sincerely accept that value management is not a cost cutting exercise, but a systematic approach to enhance the value. One of the simplest definitions of value could be “the lowest cost to reliably accomplish functions, needs, desires and expectations of the customer. It can be represented as,
Functions can be further grouped into basic, required secondaries, desired secondaries, unwanted secondaries, alltime functions etc.
Basic Function: Specific work that a product, process, construction project or a procedure is designed to accomplish.
Secondary Functions: Other functions performed by the above and are subordinate to basic function.
Required Secondary Functions: These are functions that are necessary to allow the basic function to happen or happen better. (eg enlarging images for an overhead projector).
Desired Secondary Function: These are functions without which the product can meet the basic function. But these are considered to attract the customer.(eg.a chargeable battery pack for a digital camera) These include the aesthetic functions as well.
Unwanted secondary Functions: These are undesirable byproducts of either basic or other secondary functions (noise from a car).
All Time Functions: These functions are not basic but are required to be met throughout the life of the project or product.(eg. Safety)
In value management, ideas will be generated, evaluated and developed to enhance the overall value. Even the most nonsense idea should not be challenged as it could be a thought provoking one for other meaningful ideas. The project objective must be customized quality at optimum cost, provided it meets the basic and required secondary functions. The desired secondary functions and aesthetic functions need to be well defined under customized quality. The extent, to which the impact of unwanted secondary functions has to be mitigated, is also a governing factor for the cost figures.
Role of Project Sponsor/Owner
The life cycle cost of a plant or facility can be optimized only if the best value management methodologies are practiced through the entire “Project Life Cycle”. The client can practice “Carrot & Stick” to motivate the EPC Contractor; “Carrot” part being the incentive to share the benefits of value addition and “Stick” the precondition of value management expertise for the project team, for bidding the job. Life cycle costing concepts must be very clear for the client's core team and they must appreciate that value management needs to be practiced with due respect to contractor's profitability as well. Without a very close and synchronized commitment of the client and the contractor, optimization of “Life Cycle Cost” (LCC) is highly unlikely to happen. Since the ultimate beneficiary of value management is the client, lack of initiative and leadership on project sponsor/owner's side can cause irreparable and disastrous damages for the plant or facility being built.
Since the process control upgrade projects are so unique with very limited historical data availability, a casual approach on the operation and maintenance personnel's side during the design development phase of the project will lead to missing opportunities for value improvement. Project sponsor/owner needs to emphasize this.
Role of Project Manager
The project leaders must take Value Management to a personal level in order to create lasting improvements within the systems of the EPC Companies and thereby ensuring optimum life cycle cost to the project sponsor or owner. Project Manager has to look at the big picture from the owner's perspective so that he can really feel the owner's objectives. Sometimes it will demand changes at process level, operations level, or even at business level to rise to the owner's expectations. The project manger must be able to convince the owner for offering the, the FEED/EPC contractor the opportunity to share a portion of the value addition in dollar terms, if the concept is brought up and proven by them. The project manager must also convince the whole team that “Value management is all about value enhancement and not cost cutting”.
Impact of Value Management at Various Costing Stages
Though value management has to be practiced throughout the project, its impact, and therefore the benefits, can be maximized in the early phases of the project. Exhibit 1 gives a graphical representation of this concept. Like any other project, in process control upgrades as well, the cost decisions are taken in the following major phases.
- Design Basis Scope Paper (DBSP) – Preliminary Estimate.
- Front End Engineering Design (FEED) – Proposal Estimate.
- Estimate by “Engineering, Procurement & Construction” (EPC) contractor.
- Basic design & detailed engineering.
- Execution of value engineering proposals
- Cost control during project execution
Value management methodologies give results right from the DBSP phase. Any DBSP prepared for these upgrade projects without effective coordination and proper understanding between the executive management and the direct beneficiaries (Operation & Maintenance departments) will generally become fleshier during the development phases. If the beneficiaries expect beyond the objectives of the executive management, misunderstandings are resulted between the client and the contractor. Therefore the first value engineering session should take place during DBSP itself, however short it may be (say just 2 days). The team should not argue about Diamonds and Emeralds when the executive management is having Coal in their concepts on the project.
Next important phase with higher level of expertise is the FEED stage and a longer VE workshop is recommended at about 40% level of FEED package. Here the cost data are available for all major elements of the project. This workshop must be attended by members of the client's and FEED Contractor's teams. Returns from process control upgrade projects depend greatly on the efficiency of the other equipment of the plant/facility, which are not replaced. This leads to a sort of “limitation”. Since developments in the areas of DCS and other subsystems are very fast, the team has to carefully arrive at the best value. Some of the functionalities of a new system may not be beneficial to an existing plant.
The third stage for value engineering is the basic design and detailed engineering where the coordination between client and EPC contractor is very critical for best results. Note that the project has now progressed further and the cost of implementation of value engineering proposals is more than the FEED stage. Here again, the V E study has to be conducted at around 40% development of the final engineering deliverable. Expertise and past history on value management must be strong criteria for selecting the EPC contractor. EPC contractor's engineering team must have value specialists with formal certifications, as this is the last stage for major value additions to the plant.
Exhibit 1: Cost of identifying and implementing a value enhancing opportunity in the project
Value Engineering During FEED Stage
As stated earlier, this is the first major opportunity for value enhancement. Unlike many grass root projects, a very reliable historic data will not generally be available for any specific process control upgrade project. Furthermore, the DBSP will have many ambiguous elements to be carefully developed into specifications and clauses. With the current economic sluggishness in the industry and growing competition in the EPC sector, the poor visualization of the exact scope of the project during pricing becomes very critical for the contractor's profitability.
The very first aspect in VE during FEED is to justify the necessity of the project itself or the form the project is in. The information collection phase of the VE workshop is very important here, as many of the documentation for the existing plant/facility may not be as-built for the changes incorporated after its commissioning, happened probably decades back. Furthermore, creativity in this stage has to reach very wild levels.
Any project could be built without errors or risks if the owner can afford the cost or time or both. In simpler terms, there is no problem that money cannot cure. However there should be an ideal mix of cost and schedule. Do not try to achieve or perform the impossible as it always require some waste that no owner can afford.
Everything should be made as simple as possible, but not “simpler”. This will ensure the right and best understanding for all stakeholders. Sounds very logical? But this is easier said than done!!
Value Engineering during Basic Design & Detailed Engineering
Many a time the design and detailed engineering phases unearth scope contents not considered during bidding. The contractor will generally try to capitalize on each of such situations through a change request. With the client's budgetary constraints and organizational difficulties in formally admitting the “miss outs” during the FEED stage, this will run into uncomfortable relationship between client and the contractor during the execution phase.
The EPC Contractor, especially their design team must realize that the client needs only customized quality (may not be the best quality) at the optimum cost. The EPC contractor's team can ensure the best value for each dollar spent only if they clearly know the goals and objective of the project owner and their own management. A project team may have all the skills and equipment, but if they don't realize the target through the best value management concepts, it may end up as a well-managed bankruptcy. Special care must be taken about design engineers who pride themselves on their ability to find better ways to achieve the end result, regardless of cost / schedule impact.
The client's team should be good enough to work together with the EPC Contractor to optimize the life cycle cost of the plant or facility. But many a time EPC/Construction contractor's managers complain that client knows and tells, only “what they don't want”, but not “what they want”.
Generally the VE workshops identify the “Technical Risk” as a byproduct. It helps the client and contractor in assessment and response planning for these risks. Many times these risks get exposed while analyzing the “Unwanted secondaries”.
Information about existing facility used in this VE study needs to be the As-Built drawings certified by maintenance department to ensure true reflection of any changes/modifications carried out after the commissioning of the existing system. Major discrepancies observed during field survey, from the retrieved as-built documentation have to be thoroughly analyzed and clearly documented for potential risks and/or possible positive amendments to contract scope for absorbing any additional expenditure not envisaged during FEED and the contractor's pricing.
In some cases additional cost impact may have to be absorbed during EPC phase to address a potential safety hazard (which is an all time function), even though there is no contractual tool to compensate for the additional expenditure. Documenting such cases will be valuable as lessons learnt.
Cost Data used for Value Engineering Studies
Cost data is one of the most important elements of the information bank for the VE study. Value enhancement is addressed from the largest cost element and moving to smaller ones depending on the workshop duration and expectations of the client. Therefore a “Pareto chart” (see figure 2 as an example) will be a good way of representing this data. Pareto's theory and concepts state that in most of the projects 20% of the items cover 80% of the costs. Though accuracy of the cost figures is important, the representation in a Pareto Chart is more important for identifying potential value improvement areas.
Exhibit 2: A sample Pareto Chart for a Process Control System Upgrade Project
Resistance to Change
A major difficulty always faced in value management on process control upgrade projects is the resistance shown by the owner's team currently managing the plant/facility. Generally these plants are of more than 10 years age and employees feel uncomfortable to change their working style. As a good example, in some cases the advanced automation level itself is challenged, as some of them may not have the qualifications and skills to operate or maintain the proposed system. Such vested interests act as major roadblocks for practicing value methodologies. They just do not appreciate that “Change is the KEY to progress”. The “we don't do things that way” or “we have been doing it successfully for many years” or “we are different” or many similar approaches shown by these employees have to be diplomatically handled along with clear message from the senior management about it's commitment towards the proposed upgrade.
Evaluation & Development of Ideas
This is another area where the professional approaches are ridiculed by a small group of owner's representatives so that things ultimately happen in the way they want at the owner or contractor's cost. In many instances the contractor ends up paying for the over-design because of some ambiguity in the scope. However such situations can be minimized through effectiveness of VE session during the FEED stage. In the current global market a smart EPC contractor studies the VE report for the FEED stage carefully while making his offer for the job. This in turn justifies having value management expertise with the EPC contractor to avoid expensive disastrous assumptions being made.
All aspects related to project procurement and future inventory level requirement are highly significant during the evaluation phase. Many times the purchase orders for long delivery critical items will be placed very well in advance compared to the progress on design development. Easy availability and inventory levels have to be weighed against the life of principal and critical spares of the equipment. Standardizing with prominent equipment suppliers guarantees best quality at best price and with assured after sales support. Technological advancement in any field should be given deserving weightage, even if the cost addition is major requiring budgetary revisions. Operational efficiency, reliability and maintenance factors have to be of paramount importance while attempting a trade off with cost.
Another aspect often left out is the training requirement for the existing team of the owner on the new system or equipment. Though it is handled as a part of the procurement process, customized training needs have to be identified during the evaluation phase of the value engineering sessions. Onsite and overseas training needs are very critical for ensuring the efficiency and capacity utilization figures offered by the new system.
Value Analysis & Constructability Analysis
Value Analysis is something missed out in many projects and in some cases the cost paid later for the lost value enhancement opportunities are unimaginable. In process control upgrade projects the magnitude can be more. Of course there are some limitations in implementing ideas brought up during value analysis, as the documentation is in “IFC” (Issued For Construction) stage and most of the major and/or long lead equipment are ordered. However the outcome of Value Analysis still helps to identify the lost opportunities as a lesson learnt from the project.
Constructability analysis has to be commenced right from the FEED stage by construction experts working closely with the Engineering expertise. Wasting time and energy on something not constructible must be the last thing any project team must do. It is advisable to have a team of three people looking at the constructability aspect. This team must be ideally of a construction expert, engineering expert (from FEED contractor and later from EPC contractor) and coordinator from the owner's side for arranging operation and maintenance expertise as required from time to time. This team must have easy access to the project manager to ensure that the ideas and concerns related to constructability are carefully analyzed with the seriousness it deserves.
Despite today's awareness on project management concepts, at least some project managers still feel that “Fast Tracking” can be easily handled anywhere and everywhere. In simple terms, “Fast Tracking” means “Doing some activities in parallel, where as the ideal and logical way would be in series”. Many times in these upgrade projects, unscheduled shutdowns of critical process areas tempt the client and the contractor to go in for installation with incomplete/premature design documentation, without carefully analyzing and assessing the risks related to it. A formal constructability analysis has to be conducted before any such event. Any “Fast Tracking” situation needs to be thoroughly analyzed for a trade off between risks and schedule/overall cost advantage to client and contractor.
“Workaround” is yet another typical situation calling for constructability analysis. Workarounds are responses to negative risk events. It is different from a contingency plan, as the workaround is not planned in advance of the risk event. It has been always found that many workarounds are proposed and accepted in a very casual manner. It must be attempted only where it is extremely necessary, and that, too, after very careful analysis.
Cutover to New System
Cutover from the existing to the new system is always critical for process control upgrade projects. While shortening of the cut over period is always advisable in view of the production loss during this periods, any specific compromise made by the EPC contractor in their own or the client's interest needs to be carefully analyzed towards the impact on overall value/life cycle cost. In many cases short-term pressures mounted on the project sponsor during the cut over phase accommodates slippages on almost everyone's part without looking at the big picture. The client's team should be well tuned wit the contractor's team in a very healthy and professional way, for the best cut over philosophy.
Contribution of Project Management Systems
Value management methodologies cannot be practiced if there is no proper “Project Management” system in place. Though the Cost, Time & Quality triangle is directly linked into the value management methodologies, all other aspects of project management have to be well in place for best rewards from value management. Project manager should realize the concept of “you can't do it alone”. Individuals may win trophies; it's teamwork that brings championships.
Never be foolish enough to believe that computer softwares can fix all your problems. Only a teamwork and open atmosphere can promote value management on these projects. Some retrofit situations will be so critical that the team (client & contractor) needs to assemble on the site to analyze possible options and go for the one giving best value. A “Risk Register” needs to be maintained effectively on these projects, with frequent updating. A close analysis is required for, which risks are occurred? And what was the impact? Also was it to the extent it was originally anticipated? Similarly, a “Value Register” helps tracking the possible value enhancements.
Management of project interfaces plays a vital role towards the value enhancement opportunities, right from identification to execution. This can be ensured only if there is effective project integration in place. This in turn calls for good communication system throughout the project.
Lessons Learnt Exercise after a Process Control Upgrade Project
Value enhancement is an area where only “the sky is the limit”. Therefore no project can guarantee the “Best value” as there will be always something “Better”. Formal, non-critic and sincere lessons learnt exercise is always required to stand up and look back. A generally found aspect for process upgrade projects is that these sessions end up as “blame storming” instead of “brain storming”.
Apart from the conventional “Lessons Learnt” sessions, specific emphasize must be given to the value management aspects, covering achievements and missed opportunities. As a minimum, the following aspects have to be addressed during the lessons learnt workshop for a process control upgrade project.
- How many and at what stages VE Studies were carried out?
- How many of the potential value enhancement opportunities were implemented?
- Were there potential value enhancement opportunities rejected due to any reason, especially due to wrong timing?
- Was there any missing basic or required secondary function identified during any VE study?
- Which could have been done differently to mitigate any problem faced on the project or identified after installation?
- Which discipline or party caused major or interface problems?
- How accurate were the original time and cost estimates?
- Which were the major scope variations (positive and negative) approved in the project?
- Was there any variation initiated from the outcome of any value management exercise?
- Did the owner's team managing the existing set up clearly see the big picture while participating in the project?
For its very uniqueness, the process control upgrade projects call for more concentrated, systematic and synchronized efforts of the project sponsor / owner, team managing existing facilities and the FEED & EPC contractor to ensure the best value for the capital investment.
Chandra, P. (2002) Projects – Planning, analysis, selection, implementation and review New Delhi: Tata McGraw Hill
Kerzner, H. (2003) Project management– A systems approach to planning, scheduling and controlling. Hoboken, NJ, USA: John Wiley & Sons Inc.
Save International, www.value-eng.org
© 2005, Madhu P Pillai, PMP, AVS, CCC
Originally published as a part of 2005 PMI Global Congress Proceedings – Edinburgh, Scotland