Tonchia S. Industrial Project Management Planning Design and Construction

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146 11 Project Initialization

The technical specifications are essential for the acquisition of technical

knowledge specific to the supply of the order. These are made up of various sections

such as the main features of the proposed plant, the design concept and the process

(depending, obviously, on the product line in question).

Specifically, the detailed contents are as follows:

– Mechanical equipment: detailed description of the machine being supplied, its

technical–structural features

– Automation and electricals: a detailed description of the components being sup-

plied such as Programmable Logic Control boards, electrical boards, etc.

– Motor and sensor list: one of the documents linking the functional mechanical

part to the electrical part

– Auxiliary plants: for example the compressed air production plant, water treat-

ment plant, which the Customer can also purchase directly and for which the

specifications are needed

– Civil works and buildings: can also be purchased directly by the Customer and

Danieli for turnkey plants

– On-site services: a detailed description of the duties and activities to be carried

out on site by Danieli supervisory personnel for erection, startup and production

– Training: complex plants where Danieli is the supplier of the training courses.

The theoretical courses are held in classrooms while the practical courses are

held in similar plants

– Operational parts and spare parts: in most contracts, the recommended running

and startup spare parts are defined right in the first phase

– Engineering and technical documentation: this is the engineering required to

make the equipment, install the plant systems and make the various auxiliary

plants

– Tests and Guarantees: where agreed on with the final Customer, they provide a

description of the contents and the operating procedures, all the tests to be done

on equipment once it is installed on site and all the performance tests to be done

in order to prove the contractual capabilities of the supplied machines or plants

– Time schedule: a diagram showing the project due dates defined together with

the final Customer. It contains the deadlines for all the main process phases and

the time required to carry them out as well as the milestones; this is a fundamen-

tal aspect of the contract

– Definition of scope of supply: a description of the contractual items according

to Work Breakdown Structure (WBS), indicating if they are to be supplied by

Danieli or the Customer and the required engineering

– Alternatives and options: possibilities of future expansion

– Drawings: the drawings included in the offer

– Documentation: specifies the type and format of documentation, i.e. hard copy,

electronic medium, language, logos, etc.

The offer is analysed according to the documents issued during the negotiation phase.

The project manager will focus his/her attention on the engineering attach-

ments (trying, wherever possible, to standardise the documents or personalise

11.1 The Commercial Phase 147

them for loyal customers), and share the information with the Proposals Manager

and the Sales Manager, to study and set up a strategy for manufacturing, procure-

ment and purchase.

He/she will put all his experience on the table.

Organisation and general coordination in this phase are the responsibility of

UTC, which coordinates the various work groups and decides when to schedule the

REO if there is a chance of getting the order. Before this there are macroplanning

activities to be done, not mentioned here, that are very important to establish an

operating and market strategy.

To proceed with the evaluation a meeting is called to present the job, which must

be attended by the level 2 Managers of the Organisation Breakdown Structure

(OBS) of the product line (LdP) or their delegates representing the various business

units involved in the project in accordance with the characteristics of the job in

question. In any case a senior project manager must be present to convey his/her

experience and carry out the necessary analysis.

The people called to the meeting have to establish the milestones and job order

strategies looking through the conditions and the availability of the market.

In the REO the Project Manager assists the Sales Manager in checking and ana-

lysing the following aspects:

– Contractual project schedule and payment schedule.

– Lead-time clauses.

– Coverage required in terms of bank guarantees and invoicing procedures.

– Means of transportation and any provisions as per Incoterms 2000.

– Conditions required to obtain the Provisional Acceptance Certificate (PAC) and

the Final Acceptance Certificate (FAC).

– The vendor list, which is a specific detailed list containing the names of Danieli’s

sub-suppliers for products featuring technologies that do not belong to Danieli

& C., such as for example motors, hydraulic pumps, etc.

– Any particular clauses referred to in the contract.

– Scope of supply: it is checked to make sure that it is consistent with the technical

attachments.

– Purchasing strategies: analysed and defined together with the departments con-

cerned are the purchasing strategies for critical E products (civil works, buildings,

erection, long delivery items, etc.) in order to guarantee continuity during

implementation.

In the spirit of Velocity and prompt reliable organisation, the REO Meeting is run

in a concentrated manner, where forces and experience combine to draw up a

checklist that highlights critical points.

The technical aspects refer first and foremost to feasibility including time, new

equipment, technical performances, knowledge of the project through experience,

time required to make the equipment, procurement and implementation. All these

elements are combined to define the job process. In addition to the technical issues,

also the commercial aspects such as risks on payments, country, financial limits and

rules are obligatorily identified.

148 11 Project Initialization

This establishes, once the order is obtained, what in the future will become the

implementation and job management strategy.

This meeting has two fundamental goals:

– To apprise the sales manager of any corrections and to point out the elements

that should be discussed with the customer

– To provide the company with enough information to update its macroplanning

model, which includes adding the job order to the workloads of the technical and

production departments so that it is always in line and ready before the job is

awarded

An example is the checklist as per Table 11.1, that is prepared before the meet-

ing is called and then updated during the meeting.

The checklist contains the general contract references: the customer and the

country; the type of contract, i.e. turnkey, joint venture, consortium, etc.; it includes

a description of the main equipment supplied, the process requested by the cus-

tomer and the subject of the contract.

It comprises a list of all the participants so that they can be contacted to provide

their assistance and experience.

The participants in each meeting can vary depending on the type of contract.

However, following are the departments and business units that may be involved:

UTC (Proposals Department); UT (Technical Department); PM (Project Manager);

UAC (Purchasing Department); MAC (Erection, Startup and Commissioning); DA

(Danieli Automation); DE (Danieli Engineering); DCC; UP (Production Department);

UTECH (Technological Department);CC (Cost Controlling); UTI (Plant Systems

Department).

Table 11.1 REO form

Items Discussed Approved

Technical verification Yes No NA Yes No

Layout

Process

Dimensions and technological parameters

Scope of supply and exclusion

Areas/no standard equipment

Project plan

Environmental–technical condition for materials

Requirement for safety and environment

Supervision to erection and commissioning

Training and manuals

Spare parts and consumables

Supply of D.A. and associated Co.

Prescription for control and quality

Norms referred to Danieli standards

Performance Guarantees

11.1 The Commercial Phase 149

The essential documents to be submitted at the offer review meeting are the lay-

out, the scope of supply, the time schedule and the price table.

The REO document contains the Project Manager’s notes on the plant and the

machines together with the comments of the various people that took part in the meeting.

The report states the outcome of the review and the critical points encountered so

that, once the order is obtained, everyone is informed and can verify the status of

the critical points in the signed contract.

The offer review process is not limited to the REO meeting but continues in par-

allel in the technical departments, where the specific contents of the technical

specifications are examined, and in the production department, where the features

of the ordered equipment are studied.

The technical analysis refers to the following: type of product, feasibility of

making the plants according to contractual data and requirements, whether the sup-

ply contains repeated machines, whether new drawings are required to make certain

machines, whether a plant is new or existing and performance evaluations of

machines or plants.

If, following this analysis, it is found that for certain machines the drawings are

ready, they can be sent to the production department immediately, streamlining

purchasing and delivery times.

Product analysis focuses on whether the product is an internal product made in

our own workshops, whether it is purchased externally based on Danieli’s detail

drawings, whether it is purchased externally based on Danieli’s basic drawings,

whether it is made and purchased externally, whether it is an off-the-shelf product

with special technologies, and the type of product.

To cut purchasing costs or because of particular commercial conditions, some

customers may prefer to locally manufacture certain machines themselves, such as

those without a high degree of technology. In this case we have to check and analyse

what kind of machines are made locally based on Danieli’s detail or basic engineering,

which could involve the conversion of drawings to comply with local manufacturing

standards, or checking detail drawings prepared directly by the Customer.

In this phase it is essential for the Project Manager to work together with the

other managers in order to calculate the time required for engineering and manu-

facturing, determine whether more detailed quality control plans are required and

decide on particular or necessary machine tests.

As for the types of plants in question, unlike individual machines, new machines

are used in extensions to existing plants or in what is referred to as modernisation

or revamping.

These three types of plants require different types of planning because they are

not the same and often have elements that need to be defined while the engineering

is being studied and prepared.

For example, if we want to build a new plant (greenfield) it is important to

decide on the basic project parameters with the customer, after which Danieli will

supply its own experience and resources to obtain the best results.

If we want to revamp a plant, we need to do surveys and reutilise the engineering

from the existing plant (it is often so old that it has been misplaced or has

150 11 Project Initialization

deteriorated beyond repair). This also increases the risk of the new and existing

plants not being compatible with one another.

The document common to everyone, which acts as a link between the various

business units and is the basis of the project itself, containing basic company infor-

mation, and which in the future will contain all the job order process data, is the

JET (Job Enterprise Target).

The JET, in simple terms, is a list of activities forming part of a job. These items,

structured in different blocks corresponding to the various area/sub areas, make up the

machines, plants, engineering and services included in the job; each item is associated

with the cost centre responsible for the performance of the corresponding activities.

Furthermore, each item is characterised by a description and, if applicable, by

classification, parameters, weight, cost centre, discipline and reference/drawings

and job, unit and total cost.

The JET is entered into Danieli’s One World computer system.

The PM will prepare a preliminary macroplanning document based on the follow-

ing items: the general scope of supply, the supply timetable and JET analysis (initial

state of job data), the risk analysis, the profit and loss account, the Cash Flow.

Specifically and based on our experience, we can say that the PM’s work refers

to the following:

– Engineering in terms of timetables and shipping procedures to customers

– In collaboration with MAC, gathering important feedback from the job sites

– Particular technical conditions such as Take Over Points (TOPs), engineering to

be done by the customer, site conditions, exclusions to be added to contracts for

plants other than turnkey

– Contract Time Schedule

– Performance and preconditions with the collaboration of MAC and the technical

team, to establish timetables, conditions and preconditions connected with the

commercial offer and therefore with the economic aspects of the contract

– Procedures for invoicing, shipping and certification of documents of the com-

mercial offer

Considering that the Project Management Department is involved in the offer

phase, the layout and scope of supply should also be discussed as well as any critical

points of the country of origin and the vendor list.

The PM is involved from the offer review phase until the last shipment is

delivered to the customer and the technical and economic phase with the customer

has come to an end.

The commercial/economic/legal review is done according to the same procedure

used for the technical part using a similar checklist that must include the following

items:

– Vendor List (if there is one it has to be attached for the purchasing and technical

departments): a list of possible Danieli sub-suppliers or the customer may prefer

or impose sub-suppliers for off-the-shelf equipment or equipment not made with

Danieli technology such as, for example, motors, power transformers and

hydraulic components

11.1 The Commercial Phase 151

– Whether it is an onshore contract or includes the local supply of equipment in

the customer’s country

– Whether payment terms are standard with down payment, engineering phases,

shipping phases with pro rata payments, hot test phase, acceptance and perform-

ance phases of plants and machines

– Confirmation of any Financial Coverage specifying any foreign amounts to be

paid depending on the type of loan

– Monetisation and application of events that involve contractual penalties

– Delivery conditions and shipping procedures according to the limits and rules

required to carry them out properly

– Laws and regulations applicable to the contract

– Analysis of critical contractual points with an indication of possible risks

– Any other economic and financial responsibilities of Danieli & C. in

consortiums

– Manufacturing strategies and application of cost category to prepare estimates

– The possible existence of restrictions in the manufacturing or shipping countries

that could affect goods with certificates of origin

– The possibility of expediting by the customer, which could entail economic

impacts, according to the equipment shipping timetable and the corresponding

pro rata payments

– Then, in the same manner as the technical part, the result of the economic/com-

mercial/legal review is recorded together with the critical points

Therefore, if we consider the commercial aspects of the contract and their connection

to the payments and drawdown periods, we can establish a possible drawdown

curve and then determine job cash flow.

It is important for a Project Manager to have detailed knowledge of how invoic-

ing will take place and the events triggering the issue of the invoice.

The down payment, which is the first payment that initiates job activities, generally

ranges from 10% to 30% to cover the initial organisational expenses and the engineer-

ing and, as far as possible, the machines to be made. We have to state and know which

documents need to be processed to set this procedure in motion, as in certain countries

transactions such as this one could take a long time because they are subject to approval

from state institutions, financial institutions with lengthy bureaucratic procedures,

which can therefore impact the general job schedule especially in determining the start-

ing point, which is the coming into force of the contract (CIF – Coming into Force).

More and more contracts require that payments be made in various instalments,

tying them to the delivery of the working drawings and therefore to the progress

report. In this case coordination with the technical departments is important, which

means that macroplanning takes on considerable importance in the strategy and

management of the various product lines.

As for the payment of the equipment and therefore the shipments, it is important

in drawing up the documents that are shipped together with the goods according to

INCOTERMS 2000. Also, special attention must be paid to particular import regu-

lations in the various countries where the goods are shipped.

152 11 Project Initialization

Supervision to startup and commissioning of plants and issue of commissioning

certificates represent the final stages of the contract, which must be coordinated with

MAC and which are followed by acceptance of the plant by the final customer. This

is of considerable importance as it triggers payment of the final contract instalment.

Financial conditions for collection are as follows:

– The letter of credit and its transcription procedures, its contents to be defined

with the customer and the banks

– Telegraphic cash transfer to a bank, which has received instructions directly

from the customer

– Promissory notes and all related information such as release date, expiry date,

etc.

– Bank guarantees issued by Danieli linked to financial events.

– Contractually specified taxes and those levied in the various countries

– Penalties tied to job events and milestones agreed with the customer

The Contract signing event is the milestone where the participation and presence

of the PM during contract signing is generally required for special and large

projects to implement the synergy company actions.

This is because the contents of these contracts are more extensive and the Sales

Manager may require the assistance of the Project Manager for the final confirma-

tion of certain parts of the contract that will be managed directly by the PM after

the signing of the contract.

The Project Manager’s presence is usually required during final negotiations for

the reasons explained here.

Modifications to the contract that the customer requests at the last minute during

final negotiations to avoid in-depth discussions (these modifications are generally

penalising for the supplier who is forced to accept in order to avoid starting up the

commercial discussions again or having to deal with any competitors). In addition

to providing support in making the final decisions, in these cases the PM can filter

the customer’s requests and explain the impact that these last-minute modifications

can have on the agreed overall job order process. The Project Manager’s negotiating

experience in this stage is important in getting to know the customer and laying the

groundwork for a relationship that must be or become friendly, to gain the customer’s

trust by ensuring the final result at any cost. Modifications to the contract attachments

may also be requested if they are related to or affect the contract time schedule.

They could, for example, refer to the delivery of engineering and equipment. At the

last minute the customer tends to wring an earlier delivery date out of the sales

manager for the engineering or the equipment. In this case the PM, having done the

macroplanning, should be able to realise the importance of the modifications

requested by the customer within the general framework of activities and try to turn

the situation to his/her own advantage since these are last-minute changes that

would involve a contractual compromise and which could weigh on or be signifi-

cant in terms of project economy. He will therefore have to provide clarifications

on locally made or co-manufactured equipment included in the scope of supply.

During commercial negotiations, the scope of supply, engineering included, is

split up. In this stage it would be useful, especially if requested by the Customer, to

clear up the general aspects related to locally made equipment. This means, for

example, that Danieli’s engineering may contain particular control devices that are

not easy to find on the local market and that have to be imported by the customer.

These details are often not dealt with during commercial negotiations but during

execution, which becomes a supply problem within a budget that does not take

these devices into account. In this case, the PM, for example, can come up with an

operating procedure for a technical–economic solution or the Sales Manager can

intervene simply by changing the supply.

In co-manufacturing we provide a general explanation of the contents of Danieli’s

supply. For example, when drawings are converted (from European to Chinese)

Danieli will make an effort to find materials that are equivalent to those found locally,

on the specific request of the customer, but without intervening directly or independently

in the conversion of the drawings to the local standards of the country.

In the final negotiation stages the PM must provide support to the sales manager

and instil trust in the Customer by showing operational synergy.

11.2 Offshore Technical Phase

The offshore technical phase begins on the date of coming into force of the job and

ends once all the shipments have been made for a typical supply of machines and

plants, but it also provides support to the site activities coordinated by MAC

through a Project Manager of the business unit, which has to answer to the job

Project Manager (Fig. 11.5).

The PM immediately focuses on the first phases of the project and constantly

interacts with the Sales Manager to maintain the relationship that was established

with the customer during the commercial stage.

The coming phase of the job is called CIF and at this stage the Project Manager,

together with the Financial Department, will instruct the departments concerned to

issue a downpayment invoice and any bank guarantees.

He/she will also follow up to ensure that the customer makes the downpayment

allowing the job to come into force.

This follow-up becomes important in countries that are known for complex pro-

cedures for obtaining authorisations and carrying out financial transactions. The

PM works towards coordinating the various departments and monitoring this first

important contractual step, which, among other things, should already be specified

in the preconditions.

For example, the down payment invoice will have to be submitted to the Customer’s

bank together with an Advanced Payment Bond Bank Counter Guarantee agreed on

with the customer and added to the contract’s commercial conditions. Therefore, we

have to be clear on who does what in order to monitor the situation properly.

Another case that could seriously complicate the situation is a contract with a

Ukrainian customer, requiring that we produce the documents to obtain a building

permit from the Ukrainian National Bank, according to current Ukrainian legislation,

a list of documents to start the project as well as statutory documents of Danieli & C,

11.2 Offshore Technical Phase 153

154 11 Project Initialization

justification of the equipment supply times, technical description of the supplied

equipment, detailed commercial specifications and overall layout drawing of the sup-

plied equipment with itemisation as per detailed commercial specifications.

The lead time for this transaction obviously has to be as short as possible.

As regards the activities to be coordinated in the job order process, the offshore

technical phase includes the following:

– Detail design and workshop drawings

– Fabrication and manufacture of equipment

– Purchasing of the various components and materials required for the project and

its completion, including both equipment and plants

– Planning and shipping of materials and equipment to their place of destination

The Project Manager gives oneself up completely to analyse the document of the

acquired contract and start its job organisation and resource coordination.

This includes all the typical operations that follow internal information flows,

data processing, data implementation, data exchange and information for the prepa-

ration of engineering, purchasing, manufacturing and shipping.

Therefore, in order to have a clear vision of the project, the PM examines the

contract documents that are now definite and final, looking into the Technical

Specifications and the Commercial Part.

Figure 11.6 represents a flow chart that can drive the PM on its steps giving the

overview of the first stage of the project activity.

Fig. 11.5 The work project schedule

DESIGN

MANUFACTURING

PURCHASING

DELIVERY

ERECTION

COMMISSIONING

PROJECT MANAGEMENT

SITE PROJECT MANAGEMENT

PROJECT START UP MEETING REQ.

LIV.1 O.B.S.

FOUNDATION

FLUID

MECHANICAL

AUXILIARY

FLUIDTECH

TECHTEAM

TECHNICAL OFF.

TRAINING

DANIELI

AUTOMATION

DANIELI CENTRO

COMBUSTION

DANIELI

ENGINEERING

CONFERMATION &

AGREEMENT OF K.O.D.

K.O.D.

REV.

By PM

CONTRACT

TECHNICAL ANALYSIS

COMMERCIAL

VERIFICATION

FINANCING

PURCHASING

K.O.D

By PM.

PROJECT SCHEDULE CONFIRMATION

OPERATIVE JET 2

CONFIRMATION FROM REO

PHASE

TO THE MONITORING PHASE

production

engineering

purchasing

distribution

SERVICE

Fig. 11.6 Flow chart activites for job startup

11.2 Offshore Technical Phase 155