Jones D.S.J., Pujado P.R. Handbook of Petroleum Processing

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ECONOMICS 805

Compressors

Standard to be used for the design of compressors.

(e.g. centrifugal compressors designed to API-617)

Compressor type selection preferences

Rating of compressors. Includes % over normal capacity

Sparing requirements

Mode of control

Type of drivers

Type of cooling

Piping hook-ups

Fired heaters

Types and selection preferences

Any company standards

Heater design criteria, such as:

Burners & ﬂues to be designed to 125% of normal heat release

Environmental constraints

Acceptable average ﬂux, coil pressure drops, and mass velocities

Surge volumes and acceptable % vaporization for ﬁred reboilers

The rated duty of the heater asa%ofnormalduty

Allowable maximum coil ﬁlm temperature (where coking is a problem).

Coil design temperature and pressure criteria

Fuel system details (company standard)

Burner types preferred and burner control (company standards)

Instrument standards required

This section of the speciﬁcation is usually compiled by the instrument and the pro-

cess engineers. Its objective is to convey to the contractors the instrument, safety,

and control philosophy required for the company’s plants. It may begin with the siz-

ing criteria for control and relief valves that the company wishes to use. For ex-

ample:

Criteria to set the control valve pressure drop asa%ofline losses, etc.

Design capacities for control valves

Design standards required for relief valve sizing (e.g. API-520 and 521)

This item should then continue to deﬁne the company’s preferences in piping design

for control valve hook-up, relief valve venting, and relief valve locations. Some basic

criteria concerning the relief header and its condition should be described. Finally,

the section should give a list of instrument drawing symbols that the company prefers

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or, in the case of a plant being build in an existing complex, the symbols already in

use.

This completes a review of a typical project duty speciﬁcation. This document which

usually forms part of a request for contractor’s quotes may be smaller and less detailed

than described here. Sometimes the client company may wish to depend solely on the

contractor’s standards and criteria. However to ensure good competitive quotations a

document such as described here or even more detailed is desirable.

The project team

Immediately after the appropriation approval for a new project the company usually

appoints a Project Manager to look after the execution of the project as a whole. The

Project Manager is chosen from senior engineers in the company. He will be a person

with wide experience in the management of engineering and installation of petroleum

reﬁning facilities and ideally very familiar with his company’s codes and stand-

ards.

One of the ﬁrst activities of the Project Manager will be to form a team of experienced

people who will assist him in directing the effort of his company and third parties who

will be engaged in executing the project. In the early stages of the project the team will

be relatively small, consisting of the senior development engineer, a scheduler, and

a cost estimator. Later a contracts specialist and legal advisor will join the team on

a part time basis. As the project continues with the selection of the engineering

and construction company the team will include additional development/process

engineers, procurement or purchasing specialists, and one or more assistant project

engineers. This team will probably move into the contractor’s ofﬁces, so that a day by

day interface with the contractor is established.

At some time soon after the contractor’s ﬁeld ‘move in’the company’s project team

will move into the contractor’s ﬁeld ofﬁces. At this stage of the project the team

structure will be changed. In all probability the senior Development Engineer and

the assisting process and project engineers will return to their home ofﬁce and will

participate only in addressing any process problems that may arise. Their place on

the team will be taken up by one or more experienced construction supervisors who

will assist in monitoring progress both with respect to time and to budget during the

construction period.

Most oil reﬁning companies carry their own commissioning and start-up specialists.

The duty of these specialists commence when the facilities or part of the facilities

have been declared by the contractor to be complete. Their ﬁrst activity is to check

the plant out for completeness and that it conforms to the company’s standards and

ECONOMICS 807

requirements. In doing this they develop a ‘Punch List’of those items that do not

conform or require more work. After the contractor has worked through the ‘Punch

List’and the work has been accepted the plant is handed over to the ‘care, custody, and

control’of the company. At this point commissioning of the facilities can commence

with the ‘lead’specialist taking charge. Part of the duties of the commissioning

specialist is to orientate and/or train plant operating personnel to run the facilities.

The senior commissioning specialist usually remains on site to monitor the guarantee

test run and interpret its results.

Primary activities of the project team

The function of the project team has been touched on in the last section. The activities

that satisfy these functions are listed as follows:

Pre contract award:

1.0 Preparation of the project speciﬁcation

2.0 Determining the type of contract

3.0 Preparing the enquiry document

4.0 Issuing the enquiry document

5.0 Tender evaluation

6.0 Recommendation of the award contract

The ﬁrst of these activities ‘The preparation of the project speciﬁcation’has already

been discussed at the beginning of the third part of this chapter.

Determining the type of contract

Types of contracts fall into three main categories. These are:

“Lump Sum”. With this type of contract the contractor undertakes to provide the

complete plant ready for operation for a ﬁxed lump sum of money.

“Fixed Fee”. Here the contractor undertakes to execute some of the services associated

with the plant installation for a ﬁxed sum of money. All the other costs would be

reimbursable at net cost to the contractor. For example: The contract may require the

contractor to ﬁx his ‘Home Ofﬁce’engineering cost plus his proﬁt fee with all other

costs being reimbursable (this is called an Omnibus Fee contract). Other forms of this

type of contract may require the contractor to ﬁx just his proﬁt fee, or perhaps part of

the ofﬁce engineering cost.

“Cost Plus”. In this type of contract the contractor is reimbursed for all costs applicable

to the work plus a percentage of these cots as the contractor’s proﬁt fee and overheads.

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There are several factors that determine the choice of these types of contracts. Among

the more important of these are the following considerations:

Is the project subject to process design changes?

Can the scope of work be accurately deﬁned?

Is time an essential factor?

The current and anticipated trend in material and labor prices

The amount of competition among the contracting organizations

A“Lump Sum”contract would be the preferable type of contract if the scope of

work can be accurately described in the project speciﬁcation and it was certain there

would not be any major changes to the process. However, contractors would require

a reasonable time to respond to the request for a “lump sum”bid. After all they

would require the time to properly analyze the project speciﬁcation, obtain equipment

quotes, make preliminary layouts, design, and material take off for cost estimating.

The standard of the cost estimate in this case would need to be at least a semi deﬁnitive

type (see second part of this chapter).

The advantage of “Lump Sum”contract is that the owner knows from day one the

cost of the project. However, the owner is also faced with the need to closely monitor

the project to ensure the contractor does not effect savings at the expense of quality

to increase his, the contractor’s, proﬁtability.

Inquiry documents for “Fixed Fee”contracts can be prepared in a much shorter time

and with less deﬁnition than for “Lump Sum”contracts. If time is an all important

element and the project itself is so complicated that even a fairly accurate scope of

work cannot be made, then a “Cost Plus”type contract is the more preferable one. In

both these types of contract the owner has complete control over material and labor

costs. This is a big advantage when material prices and labor costs are falling, but it

imposes a signiﬁcant onus on the owner.

The types of contracts described here are the “basic”types. There are many variations

or small changes to these that are often used. For example a contract may call for a

“Cost Plus”up to, say, the stages where a semi deﬁnitive estimate can be developed.

It may then require the contract to be converted to “Lump Sum”for the remainder

of the project.

Preparing the enquiry document

“The Project Speciﬁcation”is the instruction to the contractor as to what facility is

required to be built and to what standards and codes. The enquiry document must

now include the exact scope of the work that has to be undertaken by the contractor

and what work has to be provided by the owner. It is this scope of work that will

become the basis for the contractor’s program and ultimately his master control plan

ECONOMICS 809

for executing the work. It will also be the basis for negotiations with respect to changes

and the cost/schedule implication of such changes.

The next important item in the enquiry document must deﬁne in clear terms the type of

contract. This is most important in the case of “Fixed Fee”type contract. Contractors’

bidding the work must understand fully what is included as a ﬁxed portion and what

is to be reimbursed. As mentioned earlier the contract type may be a variation of the

three major categories discussed earlier. Such terms must be clearly deﬁned and if

changes are to be made during the project such as conversion to a different type or an

addition of target pricing this too has to be clearly deﬁned. If there is a time element

for completion a Bonus/Penalty clause is often included.

The enquiry document must include information regarding the procedures to be ad-

hered to during the life of the project and toward the latter part when the plant is

considered ready for operation. Such instructions, which may affect the contractor’s

bid, are as follows:

List of approvals required by the owner

Attendance by the owner for critical reviews and conferences

Correspondence and communication to/from the owner

Preferred vendor’s list (particularly in the case of “Lump Sum”contracts)

Guarantees-process and mechanical

Environmental considerations

Site data (such as: elevation, location, ambient conditions etc.)

Obtaining licenses to build

Hand over procedures

Finally, the enquiry document gives instructions as to how the contractor’s bid is to

be submitted. This includes the number of copies required, when and in what form

the bids are presented.

Issuing the enquiry document

Prior to issuing the enquiry document and in the time span in which the document

is compiled, the owner’s company should review the contractor market. This review

should include a limited number of suitable engineering companies. Preparing bids

with the subsequent follow-up work does cost contracting companies a signiﬁcant

amount of time and money; therefore the selection of contractors to be invited to bid

should be carefully made.

In this task the ﬁrst question to be resolved is: Which contractors are qualiﬁed to

undertake this work? For example if the project requires engineering, design, and

installation of a hydrocracker then ideally the qualifying contractor should have in-

stalled a hydrocracker or a similarly complex unit before. It would not be appropriate

810 CHAPTER 17

for example to solicit a bid from a civil contractor for this kind of project or indeed a

contractor who had only installed smaller petroleum plants.

The next task is to meet with potential contractors at their respective establishments.

The purpose here is to determine the extent of their home ofﬁce facilities for engi-

neering and to establish the method they use for executing a project. The other factor

during this meeting would be to determine the spare capacity they had available for

undertaking the work and their program for growth or completing their existing ‘in

house’work.

Finally and during this meeting at the potential contractors’ofﬁces the owner should

meet the key people they would assign to the project. Certainly meeting the proposed

project manager is a must. In the case of a major reﬁnery project meeting the lead

process engineer is equally as important. Present day contractor evaluation must

include the extent of this company’s computer applications. This will be a signiﬁcant

factor in selection.

Normally three to four bidders should be selected from this pre enquiry review to

receive the invitation to bid. These selected bidders should be informed by phone or

fax and conﬁrmed by letter. In this way the bidders are requested if they are interested

to receive the bid documents and subsequently submit a bid. The bid documents when

complete should be delivered by hand if possible or by courier at a predetermined

date.

Contractors’ bid evaluation, and recommendation for award

The ﬁrst activity after receipt of the bids is to carefully review their contents to ensure

that they comply with the enquiry documents. In the case of Lump Sum bids careful

review of the equipment offered is made to ensure they meet the owner’s vendor list

and approval. The bids are reviewed regarding the commercial offer. The selection is

never made on price alone but on the complete offer. While the price at ﬁrst glance

may seem very attractive, in some cases an evaluation of the other contractual offer

may prove more costly in the end.

In most companies approval of major contracts is made by an executive group or

person. It is usually the duty of the Project Team to compile the bidders’offers into

a succinct form for review by the approval board. The Project Manager of the team

should include a recommendation for approval in the report to the company’s approval

executive.

A suggested content of a “Contractors’Bid Summary”for a Lump Sum Contract is

as follows:

Contractor’s name:

ECONOMICS 811

Total price mm $

Engineering $

Design $

Procurement $

HO overheads $

Materials

Equipment $

Piping $

Instruments $

Electrical $

Civil Structural $

Others $

Construction

Direct ﬁeld costs $

Indirect ﬁeld costs $

Total construction $

Deviation from the duty speciﬁcation

Compliance with contractual terms.

Completion time.

There may be further items depending on the enquiry content.

Project manager’s recommendation

Project manager’s notes and justiﬁcation.

The bid summary is given top priority and early completion is usually of major

importance. Most bids do carry a limit on the time that the quotes are valid. It is in the

owner’s interest to make the award within those valid dates if possible. Many owner

companies prefer to short list the bids to two or three and to interview the companies

so listed to discuss their bids before making the ﬁnal selection. This is very usual in

the case of Lump Sum or Fixed Fee type contracts. Such reviews certainly help to

minimize “Change Order”negotiations further down the line.

Monitoring the execution of new projects

Project initiation

As soon as possible after the award of the project the owner’s project team moves into

the successful contractor’s ofﬁces. The content and size of the team will vary with the

type of contract and the status of the work in the contractor’s home ofﬁce. In general

though the Project Team has more responsibility when administrating a Cost Plus

contract than either of the other two types. The major activities of the team in this

812 CHAPTER 17

section of the work refers to those required for the Cost Plus contract. Initially the team

should consist of the Project Manager, the Senior Process or Development Engineer,

one or two Project Engineers, possibly a procurement (purchasing) specialist, and a

Cost/Scheduling engineer. The activities of this team during the initial stages of the

work will be:

Conduct the client’s“kick off”meeting

Review and approve preliminary schedules and budgets for the project

Review and comment on the contractors project procedure manual

These are described in some detail in the following paragraphs:

The kick off meetings

One of the most important conferences held during the course of the project life is

‘The kick off’meeting. This takes place as soon as possible after the award of the

project by the client to the contractor. As the name implies this meeting formally

releases the contractor to begin work on the client’s plant and describes again in detail

the client’s requirements. Its purpose is to communicate to the contractor’s project

team, the scope of work, the time span required, the budget (approximate or ﬁrm), and

details of quality requirements and speciﬁcations as outlined in the client’s‘project

speciﬁcation’. Discussion should then follow on the project management aspect of

the work. The completion date required for the project is tabled together with major

milestones to be met with during the project life. These milestones usually indicate

when cost estimates (and schedules) are to be updated or when critical overall project

decisions are to be made.

This ﬁrst or formal ‘kick off meeting’conducted usually by the client’s project man-

ager is invariably followed by a second, less formal, meeting of the contractor’s project

team. The client’s team may or may not be invited to attend this meeting. However

at the end of both these kick off meetings each key member of the client’s and the

contractor’s project teams should be absolutely sure of what the project requirements

are and what role they are to play in achieving them.

Preliminary schedule and budget

Soon after the “kick off”meetings a preliminary schedule for the engineering work

and a budget will be developed by the contractor. The contractor will be able to

produce a fairly accurate schedule for the front end work based on their experience in

similar projects. The remainder of the schedule to ‘job end’will be far less accurate.

Much of this forward scheduling will depend on equipment vendor quotes and if

applicable licensor data, and later sub contractor quotations. The same applies to the

accuracy of this ﬁrst budget. However, both this schedule and budget will form the ﬁrst

control parameter for the project execution plan. On “Cost Plus”projects the clients

approval for these items is usually mandatory.

ECONOMICS 813

Review and comment on the contractor’s project procedure manual

Most contractor project managers develop a procedure manual on major projects that

they work on. This project manual contains details of the particular lists, directory

of the project team, and speciﬁc procedures that will be adopted on the project. This

eliminates the need for a great number of correspondence deﬁning instructions during

the course of the project. Although this is contractors internal document the client’s

project team is always invited to review and often participate in it’s development.

A typical project procedure manual is divided into several sections. An example of

these sections are as follows:

Introduction

Project organization and directory

The master schedule

Man hour budgets (restricted issue)

The cost code of accounts

Project control procedures

Correspondence and communication

Conferences and meetings

Filing index

Individual engineering, procurement and design interface procedures

Drawing index

Field organization and directory

Hand over procedures, and close out reports

The items given above may be increased or decreased depending on the wishes of the

contractor’s project manager. After all this is the project manager’s document although

it is compiled by the members of the contractor’s project team. A brief description of

the contents of some of these sections now follows:

Introduction

This section begins with the general information as to who the client is, the ofﬁcial

address of the client and the phone, fax, or telex numbers, e-mail address etc. It

continues with a short history of the project up to the award, and concludes with a

synopsis of the process(es) involved. This section should not be more than three or

four pages in length.

Project organization and directory

The project organization chart for the project, is included in this section. Following

the chart is a table of the key positions (and those of the client’s project team) with

the individual’s name and ofﬁce phone number or extension, and e-mail addresses.

814 CHAPTER 17

The master schedule

This is the master schedule in bar chart form which shows the scheduled progress

by discipline and activity. Initially and of necessity this will be preliminary but will

indicate critical milestone dated clearly. It may be followed by a list of these milestone

dates with explanatory notes. This will be subject to updates as the project progresses.

Manhour budgets

This includes the allocated manhour budgets by discipline for the project. This item

is restricted to the copies of the manual issued to key personnel who are responsible

for their discipline’s budget control. As in the case of the master schedule, initially

these manhour estimates will be preliminary, and will be subject to updates as the

project proceeds.

The cost code of accounts

This is a summary of the cost coding that will be used on the project to identify all

the various cost centers. This coding will also be used to identify and code such items

as purchase orders, client billing, change orders and the like. More often than not the

contractor’s normal cost codes are used for this purpose.

Project control procedures

This section outlines the reporting procedures the project manager will adopt to control

the project in terms of progress and budget. It will detail the data required from the

key members of the project and the timing of the data for each reporting period.

Correspondence and communication

All correspondence leaving the project does so under the project manager’s signature.

Similarly all correspondence originating outside the project is addressed to the project

manager. All correspondence are given a coded reference number and this coded

reference number also identiﬁes the origin of the correspondence. This reference code

is given in this section, together with instructions on the routing of the correspondence.

Detail procedures as to the communication by other means, such as telephone, e-mail,

and fax is also given here. A list giving the required distribution of all correspondence

to the project team personnel and possibly others outside the project is given in this

section.

Conferences and meetings

Routine meetings and conferences are scheduled in this section. This will also include

a list of permanent attendees to these meetings. As time taken up in meetings is a large

utilizer of manhours, the project manager may elect to outline certain recommended

procedures for unscheduled meetings in this section. All meetings on the project are

minuted, and the minutes distributed within the team and other interested parties

according to the project’s correspondence distribution list.