September September 2003 2003

The AACE International Journal of

Cost Estimation, Cost/Schedule Control, and Project Management
Our Vision: Advancement of Cost Engineering Through Total Cost Management

IN IN THIS THIS ISSUE ISSUE

Executive Article Contractor Default Insurance

Cost Cost Engineering Engineering Focus: Focus:

Certification Paper Owner Caused Delay Field Overhead Damages

CLAIMS & DISPUTE RESOLUTION

Technical Article Schedule Delay Analysis: Modified Windows Approach

Technical Article Best Owner Practices for Project Control

Certification Corner DACE Joins Joint Certification

The Ethics Corner The Challenger Disaster

The Silver Fox

Report Highlights from the 47th Annual Meeting

2002-2003 Annual
Report Supplement

Promoting the Planning and Management of Cost and Schedules

Visit our website at www.aacei.org

AACE International Board of Directors

President Ozzie F. Belcher Belstar, Inc., VA 703-645-0280/fax: 703-645-0286 e-mail: president@aacei.org President-Elect Clive D. Francis, CCC, Black & Veatch, MI 734-622-8543/fax: 734-622-8700 e-mail: preselect@aacei.org Past President Dr. James E. Rowings Jr., PE CCE Peter Kiewit & Sons, Inc., NE 402-943-1334/fax: 402-271-2989 e-mail: pastpres@aacei.org Vice President-Finance Robert B. Brown, PE PMA Consultants of Illinois, LLC, IL 312-920-0404/fax: 312-920-0405 e-mail: vpfinance@aacei.org Vice President-Administration William E. Kraus, PE CCE B & C Project Services, CO 970-206-0947/fax: 970-226-1818 e-mail: vpadmin@aacei.org Vice President-Regions Joseph Wallwork, PE CCE GREYHAWK North America, NY 516-921-1900/fax: 516-921-5649 e-mail: vpregions@aacei.org Vice President-TEC James G. Zack Jr. Fluor Daniel, CA 949-349-7905/fax: 949-349-7919 e-mail: vptec@aacei.org Director-Region 1 Mahendra P. Bhatia SNC-Lavalin Inc., Calgary, Canada 403-294-2100x2421/fax: 403-294-2875 e-mail: dirregion1@aacei.org Director-Region 2 Douglas W. Leo, CCC Eastman Kodak Co., NY 716-722-6466/fax: 716-722-1100 e-mail: dirregion2@aacei.org Director-Region 3 Robert E. McCoy, CCC BWXT Y-12, LLC, TN 865-482-7658 e-mail: dirregion3@aacei.org Director-Region 4 Marvin Woods, CCE Project Controls Group, Inc., MO 314-838-4987/fax: 314-389-8957 e-mail: dirregion4@aacei.org Director-Region 5 Stephen W. Warhoe, PE CCE 303-740-2665 e-mail: dirregion5@aacei.org Director-Region 6 Mark G. Grotefend, CCC 253-835-8081 e-mail: dirregion6@aacei.org Executive Director Ex-officio Barry G. McMillan e-mail: bmcmillan@aacei.org

The AACE International Journal of

Cost Estimation, Cost/Schedule Control, and Project Management

ESTABLISHED 1958

Depar tments
Presidents Message ................................3 Executive Article ....................................5 Education Board News ..........................7 Certification Corner ..............................9 The Ethics Corner................................10 Professional Services Directory ..............34 AACE International Bulletin ..............35 The Silver Fox Report ..........................38 Article Reprints and Permissions ..........42 Calendar of Events ..............................43

Featured Ar ticles Owner Caused Delay Field Overhead Damages

Matthew James Lankenau, CCE
This article explains the basic calculation of a daily delay rate and relevant factors. The courts have clearly established the requirements to use a total cost claim damage methodology for direct costs. However, field office indirect or field overhead costs are often not treated with the same scrutiny, despite the fact that the same concepts are evident. The total actual indirect cost to date is often used to calculate delay damages, despite inclusion of bid errors or omissions and lack of complete owner causation. The result is that additional project duration is obtained at an inappropriate premium. The owner should be able to obtain additional time at the as-bid rate unless the added scope is materially different than the original contract. This article presumes that the contract does not already establish a daily rate nor makes specific mention of its calculation.

13

Schedule Delay Analysis: Modified Windows Approach

Kirk D. Gothand, CCC

18

The schedule analysis methodology outlined in this article has been successfully presented by the author on six contract disputes in the past two years involving schedule impacts. In each dispute, the methodology was used and outlined in the analysis narrative. As outlined in this article, the claimants own schedule delays were identified and quantified easing the defendants concern that concurrent delays were accounted for. In all the cases, the resulting schedule analysis was agreed to and was unconditionally accepted by both parties. This article provides a brief description of what events lead to a dispute and the importance of the schedule analysis to support the claimants damage complaint. The schedule analysis presented in this article is based on creditable schedule analysis technique currently used to analyze schedule delay and is modified to separately analyze claimant schedule delaying events.

Best Owner Practices for Project Control

John K. Hollmann, PE CCE

25

In this article, a better approach than cutting and blind outsourcing is described; an approach that uses the best owner cost engineering practices to ensure competitive outcomes. The approach has been demonstrated to work through quantitative research of empirical industry data.

In This Issue
Board of Directors Contact List ........................1 Editors Note..................................................31 Index to Advertisers ......................................34 AACE International Sections Online ..........37 Annual Report Supplement ..........................40 2004 Call for Papers......................................44

On the Cover: The San Francisco Section of AACE International tours the Carquinez Bridge jobsite in San Francisco. Photos courtesy the San Francisco Section of AACE International.
COST ENGINEERING
Vol. 45, No.9/September 2003

AACE International Headquarters

209 Prairie Avenue, Suite 100 Morgantown, WV 26501 ph: 800.858.COST fax: 304.291.5728

Managing Editor - Marvin Gelhausen e-mail: mgelhausen@aacei.org

Graphic Designer/Editor - Noah Kinderknecht e-mail: nkinderknecht@aacei.org

Policy concerning published columns, features, and articles Viewpoints expressed in columns, features, and articles published in Cost Engineering journal are solely those of the authors and do not represent an official position of AACE International. AACE International is not endorsing or sponsoring the authors work. All content is presented solely for informational purposes. Columns, features, and articles not designated as Technical Articles are not subject to the peer-review process.

Cost Engineering (ISSN: 0274-9696) is published monthly by AACE International, Inc. Periodicals postage paid at Morgantown, WV, and at additional mailing office. POSTMASTER: Send address changes to AACE International; 209 Prairie Ave., Suite 100, Morgantown, WV 26501 USA. Single copies: US$8 members/ US$12 nonmembers (both +shipping), excluding special inserts available to AACE members only. Subscription rates: United States, US$60/year; all other countries, US$76/year. Overseas airmail delivery is available at US$99. Subscriptions are accepted on an annual-year basis only. Copyright 2003 by AACE International, Inc. All rights reserved. This publication or any part thereof may not be reproduced in any form without written permission from the publisher. AACE assumes no responsibility for statements and opinions advanced by the contributors to its publications. Views expressed by them or the editor do not necessarily represent the official position of Cost Engineering, its staff, or AACE International, Inc. Printed in Pontiac, IL, USA. Cost Engineering is a refereed journal. All technical articles are subject to review by a minimum of three experts in the field. To submit a manuscript for peer review, please e-mail it to info@aacei.org. Cost Engineering is indexed regularly in the Engineering Index., Cambridge Scientific Abstracts, by EBSCO Publishing, and in the ABI/Inform database. Cost Engineering is available online, via the ProQuest information service; on microform; electronically on CD-ROM and/or magnetic tape from Bell & Howell Information and Learning, PO Box 1346, Ann Arbor, MI 48106. Photocopy permission : Authorization to photocopy articles herein for internal or personal use, or the internal or personal use of specific clients, is granted by AACE International, Inc., provided that the base fee of US$4.00 is paid directly to Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923 USA. Telephone: 978.750.8400. For those organizations that have been granted a photocopy license by CCC, a separate system of payment has been arranged. The fee code for users of the transactional reporting service is ISSN0274-9696/02 US$4.00. This permission to photocopy does not extend to any Cost Engineers Notebook, AACE Recommended Practices and Standards supplements, or membership directories published in this magazine and/or special inserts. Payment should be sent directly to CCC. Copying for other than personal or internal reference use without the express permission of AACE is prohibited. Address requests for permission on bulk orders to the editor. ADVERTISING COPY : Contact Network Publications Inc., 10155 York Road, Suite 205, Crestridge Corporate Center; Hunt Valley, MD 21030. Telephone: 410.628.5766. E-mail: costengineering@networkpub.com for rates. Advertisers and advertising agencies assume liability for all content (including text, representation, and illustrations) of advertisements printed and also assume responsibility for any claims arising therefrom made against the publisher. The publisher reserves the right to reject any advertising that is not considered in keeping with the publications mission and standards. The publisher reserves the right to place the word advertisement with copy which, in the publishers opinion, resembles editorial matter. All advertising accepted for publication in Cost Engineering is limited to subjects that directly relate to the cost management profession. Current rate card available on request. COST ENGINEERING DEADLINES : Submissions for Cost Engineering must be received at least 7 weeks in advance of the issue date. Send to: Editor, 209 Prairie Ave., Suite 100, Morgantown, WV 26501 USA. Deadlines do not apply to technical papers.

P residents P residents Message

Ozzie F. Belcher, President

Globalization? Bring it on!

hether you are an AACE International member, or a person working in our profession, you play a very critical role as the world continues at a break neck pace toward globalization. Successful globalization continues to mean that project concepts will be budgeted and scheduled. These will often include multiple project alternatives associated with each project concept. Life-cycle-cost analysis will also be studied at the program level well in advance of any formal design, design-build, private-public partnership or turn-key agreements. If your response is, "so what" then you are missing out on the membership value, data content, and leadership that the world has recognized in AACE International for almost 50 years in the management of cost and schedules. For almost 50 years, AACE International has continued to be more than a mile wide and more than a mile deep.

International's overwhelming value was cited by Joe Wallwork, AACE International's VP Regions, during a dinner meeting one night. Joe stated that during a project interview with the client, they simply asked, "does your team have AACE International's CCC/CCE certification." Joe stated yes, and the owner began to ask Joe about AACE International and its New York Metro Section's program. About 10 minutes later, another interview panel member asked Joe about his qualifications. Finally, the other interview panel member replied that there was no need to ask additional questions. He said this was because the team members are AACE International members, and nearly 20 percent of the proposed team has AACE International certification [1]. International Recognized Intellectual Property: (Data Content) As mentioned in last month's column, Business Week magazine has written that the organizations that are succeeding in today's global market place are the ones that are content based. This means these organizations offer valuable data that people need. This statement definitely applies to AACE International. I do not know of any other organization that has a greater content base, or intellectual property, concerning the management of cost and schedules. Our website gets over 450,000 hits per month and is recognized by cost and schedule professionals as the world's leading source of this type of intellectual property. Take the AACE International "cost and schedule management challenge" by visiting aacei.org and using its search function from the library link. You may be asked to enter a membership number for access to some of AACE International's data content. If you are interested in any of AACE International's membership-only technical articles, then I recommend you fill out the online application, or call AACE International headquarters at 1-800-858cost. I also recommend that you contact

Internationally Recognized Value During the International Cost Engineering Councils report at the AACE International 47th Annual Meeting in Orlando, ICEC Chairman Steven Boeschoten, said his employers questioned the value of his AACE International and ICEC memberships and the time that he spends in both organizations. However, the value was clear to Steven on a recent project where his Dutch company was trying to decide whether to invest in the US or Canada. Steven sent out a broadcast email to his AACE International colleagues for their input on his company's pending critical major investment decision. Overnight, he received over half a dozen replies to his project inquiry. The replies covered important issues, such as union vs. non-union wage rates, US vs. Canadian business laws, and other critical issues. Steven stated that, after giving his report back to his boss, there was no remaining doubt about the overwhelming value of his AACE International membership. Another example of AACE

Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003

your local AACE International section about section membership. You have to be a member of AACE International to become a Section member. Internationally Recognized Leadership AACE Internationals leadership began at the local section level almost 50 years ago and continues to retain and attract the best and the brightest from every major industry. Today, AACE International has over 70 international sections. The organization is at the forefront of providing global innovation in the management of cost and schedules. AACE International provides internationally recognized certification training. AACE International wants to be your organization's one-stop continuing education source where you can have your personnel trained, certified, and receive the network support of our nearly 5,000 strong membership. We are now able to offer certification testing on a requested basis.

In summary: AACE International has almost 50 years of internationally-recognized experience to support all of your organization's cost and schedule training needs. AACE Internationals innovation and leadership continues with the development of more and more online training classes and access to consultants to help with your cost and schedule needs. In addition, we are in the process of developing an engineering specialty certification for scheduling professionals as a means of identifying those who have demonstrated skills, knowledge, and capability you can count on. You can find more information about other innovations in this journal or by visiting our website at www.aacei.org

Thank you for you continued interest in keeping AACE International as the world's global leader in the management of cost and schedules. I want you to know that as a member, or person considering membership, you are in good company because four of the world's top global firms are AACE International corporate sponsors and their links can be found on the AACE International website home page [2]. As the world continues it breakneck pace toward globalization, AACE International says, "Bring it on." x Ozzie Belcher President AACE International
References 1. According to an article authored by Brian Dunlop of the American Society of Association Executives, the percentage of membership that has their society's certification is approximately 18 percent. 2. Top global firm's rankings were shown in ENR (Engineering News-Record) July 28, 2003. The article is titled, "Top Global Design Firms."

AACE Internationals Approved Education Provider Program

Join the Ranks of AACE International's Continuing Education Providers

AACE International's Approved Education Provider (AEP) program is designed to provide cost and management professionals and their companies with a means of identifying suitable professional development courses and providers. AACE International's high standards for granting AEP status and its ongoing review of Providers activities, ensures quality AEP programming, which results in satisfied participants. AACE International's AEP Program offers: A provider approval system whose standards ensure quality continuing education programming Continuous quality improvement through course review and ongoing support from AACE International staff Recognition by AACE International of professional development hours (PDHs) A centralized, permanent database that maintains and issues provider reports and participant records Course promotion and organizational recognition on AACE International's website500,000 hits per month What This Means for You AACE International's AEP status is a win-win situation. You or your organization will benefit and so will your constituents. Why? The AACE International AEP program offers an established and proven process for conducting quality continuing education programs, networking opportunities with other continuing education providers, less paperwork, and broad appeal. Whether you are a consultant, professional trainer, AACE International Section, university instructor, or you are experienced in the field of educating others -- AACE International's AEP status will benefit you and your organization!
Visit our website at www.aacei.org E-mail info@aacei.org for an application Call 1-800-858-2678 or ++304-296-8444

Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003

E Executive xecutive Article

Robert Seals, Vice President Marsh Construction Consulting

Contractor Default Insurance: A Key Issue for Estimators Budgeting Capital Projects
fter 12 years of profitability, surety markets experienced significant losses in the past two years. These losses have caused some surety companies to leave the business and others to change dramatically the way they operate. Since 1998, five of the top 10 surety companies have consolidated or left the market. This is significant because, while there are about 300 surety companies, the top 20 companies currently dominate the market. According to the Surety Association of America, the market is segmented as follows: the top three companies account for 36 percent of the market, and the top 10 and 20, for 68 percent and 82 percent, respectively. Consequently, the remaining 280 or so companies write roughly 18 percent of premiums. A May 2002 survey of executives at several large surety underwriters predicted surety bond premiums would rise from 10 percent to 20 percent as surety companies try to return to profitability. In addition to price increases, sureties are adjusting their practices in other ways. Many surety companies concentrated on premium growth in the 1990s, in some instances shifting their focus away from fundamental underwriting practices. While there has been a renewed focus on fundamentals, there also is greater awareness of the risk. As these companies attempt to spread risk, more co-surety arrangements are expected, as well as joint ventures and multiple surety participation on large accounts.. Surety reinsurance also factors into the shifting price structure. Almost every primary surety company reinsures a portion of the bonds they issue. However, the number of surety reinsurers dwindled from 30 to about 14. This market has largely stabilized, but pricing, terms and conditions of treaties have changed dramatically. Reinsurance contracts previously were negotiated on a pro rata basis ; the primary surety and reinsurer negotiate and agree to share a predetermined percentage of premiums and losses starting at a low contract price, e.g. $100,000. This provided an equitable sharing of risk and reward for reinsurers. In addition, both the primary surety and reinsurer were attaching to the risk throughout the life of the obligation. Today, many reinsurers are providing coverage on an "excess of loss" basis. Under these arrangements, the primary surety incurs losses up to a certain threshold and the reinsurer takes the excess, or amount over the predetermined amount, for a flat price, with an aggregate value of loss limit. This loss limit is not risk attaching; the primary surety needs to renew the reinsurance each year, or it may have no coverage for losses from prior years. For contractors or project owners obtaining surety credit has become more challenging. This environment is being driven by surety companies seeking to return to profitability and returning to fundamentals in their underwriting practices. They also have

become more risk averse in light of the impact of the weak economy on contractors. By contrast, during the 1990s surety credit was treated like a commodity. Neither the contractor nor the surety maintained a strong underwriting/information flow. Now, project owners that required surety bonds for their projects now will be affected both by the pricing of the bonds and the ability of the contractor to obtain surety bonds. Both of these may have negative financial implications for a project owner. In this environment, owners and contractors might consider contractor default insurance. While this insurance program has typically been viewed as an alternative to surety bonds, it may be used in conjunction with surety bonds to provide an insured with added flexibility. Contractor/subcontractor default insurance first became available to the construction industry in 1996. While it provides a more direct mechanism for insureds to take control of the claim process, it also requires an increased tolerance for risk assumption by contractors and owners. The insurance originally was designed for purchase by general contractors to insure against losses incurred as a result of subcontractor default, but it now is used by some owners that want to include the default exposure presented by the general contractor as a covered event in wrap-up insurance programs. In recent years, subcontractor default insurance has gained wider acceptance among general contractors. By some estimates, as many as 20 of the top 100 contractors in the US in 2001 were using it to insure against subcontractor default for some or all of their projects. Overall, more than $20 billion of contract values have been insured under these policies. One policy introduced in 1996 focused on two basic applicationsone that could be arranged on a project basis, and the other, which could be structured to cover a portfolio of contracts or rolling program. Following are some key aspects of this insurance: The coverage is triggered by the default of performance by a covered contractor. The insured is indemnified for losses and indirect expenses incurred as a result of the default. The indirect cost coverage can be a significant benefit and includes protection for liquidated damages, job acceleration, extended overhead, and other expenses incurred as a result of a covered event. The insurance is an indemnification policy, which requires the insured to incur the expense and then seek reimbursement from the insurer. Typically, the policy allows for the advancement of expenses, limited to a stated percentage on the declaration page, under certain circumstances.

Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003

The limits of coverage can apply either on a single-project basis or to a portfolio of projects. The limits purchased typically are less than 100 percent of the value of all sub-contracts. Limits are based on a historic "probable maximum loss" calculation for surety losses, the largest single contract covered and the low probability of having more than two or three significant subcontractors defaulting on a given project. The insurance program requires a large deductible, copayments and other self-funding layers. A funded layer is usually required in a portfolio program. The insured is required to give 10 days' notice when it becomes evident that a subcontractor is or may be insolvent or in default . The owner or general contractor must have --or be willing to institute -- a pre-qualification program and be committed to using it during the life of the program.

Author's Note: Future articles in this series will include a detailed development of specific pricing scenarios, a self-assessment tool to help readers understand pricing conditions that might be associated with for specific project circumstances, a detailed discussion of additional considerations such as legal and consultative needs in using the program, detailed development of a project specific approach using the program, a detailed discussion of a portfolio approach using the program, and a review of a sample contract with a detailed discussion of significant clauses. The viewpoints expressed in columns published in Cost Engineering journal are solely those of the authors and do not represent an official position of AACE International.

A New Distance Learning Course is

announced

Estimating and Bidding

Sign up now for Part 1 of a new Distance Learning course on Estimating and Bidding that begins Sept. 15. The class is a paced, 10- week long, online class teaching how to: estimate the cost of general conditions; prepare quantity take off of excavation and backfill; prepare a quantity take off of concrete, and formwork; use unit prices to price your estimate; and prepare a quantity take off and conceptual estimate of masonry work.

A number of the key coverage issues noted above are subject to negotiation, depending on the underwriter's comfort with the policyholder. There are also the following underwriting considerations associated with this coverage: The owner/general contractor's process or programs involving pre-qualification, subcontractor procurement, and management. General history and company philosophy in dealing with contractors/subcontractors and defaults. The financial strength of the owner/general contractor. Mix of subcontractors used, typical territory, and use of surety bonds.

There are both benefits and drawbacks. The benefits include claims control, when default occurs, the policyholder is in the driver's seat in determining the best and quickest solution to the problem. Timely expense reimbursement is another plus. When a covered default occurs, expense reimbursement will occur in a timely manner. Finally, cost efficiencies are a benefit, especially in the face of rising bond premiums. The price one pays for these benefits include the need for the insured to take on the responsibility of pre-qualification, which can be a difficult task. The insurance policy does not provide a guarantee to complete the defaulted contract with the terms and conditions of that contract (this could be considered a benefit in some instances). The insured must take on the responsibility of making the decision of the best approach to solving the problem. Finally, retention and limits of coverage are issues associated with the insurance, but not with a surety bond. Surety and contractor/subcontractor default insurance are different products with different featuressome of which are complementary and others that might be considered duplicative. In the past they have been viewed as competing with each other. However, in light of the current surety market environment and general economic conditions these products are being viewed in a new light. Both insurance and surety have specific benefits and drawbacks. It's time to take the best features of both for the benefit of all project stakeholders. x

Students choose their own class hours but must complete a certain amount of work each week. Activities the student will participate in include discussions using a bulletin board, weekly online quizzes, and frequent estimating assignments. To do well in this course, you should already have the following skills. know how to read blueprints; know how to use a spread sheet software such as Microsoft Excel, Lotus 123, or Quattro Pro; have a basic knowledge of construction estimating subjects including: basic math skills; estimating terminology (quantity take off, unit price, production rate, etc.); use of the calculator and architectural scale; and, be able to organize your work so it can be easily understood by others.

You should consider taking Introduction to Construction Estimating and/or Construction Blueprint Reading, if you believe you need more information in these areas before taking this class. Those courses are not prerequisites but they will be a part of the Certificate in Construction Estimating. Check out the AACE International website, www.aacei.org/distancelearning, or contact Charla Miller at cmiller@aacei.org.

Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003

E ducation E ducation Board News

Lawrence J. Bloch, ECCE, Education Board Member

AACE International Competitive Scholarships

his is the second year that I have written an article pertaining to the AACE International Competitive Scholarship program. The purpose of these articles has been to make scholarship applicants aware of what we look for in their applications. The Section Leaders must have read these articles, and made copies for the students that your Sections have considered, because there has been a decided improvement in the submittals. Because of that, I am going to repeat most of the information that I have presented in the past. As September comes around each year, we start to think about the AACE International Scholarship Program. Since 1969 AACE International has awarded almost 800 scholarships to deserving students. The cumulative value of these scholarships approach $800,000. Being awarded an AACE International Scholarship has often been the difference in whether a student can continue his/her higher level education. The Scholarship Program is funded by the contributions that the members make when they pay their dues each year. Each of you, who do contribute to the Scholarship Fund, can take pride in having helped deserving students become the cost engineers/cost management professionals of the future. Some have also become leaders in our Association. The competitive scholarship program has become wider known with students seeking to obtain one of our scholarships. For the year 2000-2001, we had a total of 20 applicants reach the semi-finals of competition. We had 72 for the year 2001-2002. 2002-2003 had a total of 67 semi-finalists. The main reason for this big increase from the 2000-2001 year is that students have learned about the scholarship program from scholarship search websites and the AACE International website. With the increase in hits on the AACE International website, we expect that this year will even surpass what we experienced in the past. In addition to the scholarship program, funded by members contributions, the Education Board uses funds that we obtain from presenting seminars, sale of books, such as the Skills and Knowledge, Fourth Edition and other training guides such as the Certification Study Guide. With these funds, the Education Board supplements the matching funds donated by local sections for additional scholarship monies, awarded to local section designated recipients. The Education Board will contribute 50 percent of what a local section contributes, up to a maximum of $500 per local section. Whether the scholarship application is for yourself, or a deserving student, the following information is important. How the applicant prepares the application can be the difference between success and failure in obtaining a scholarship, or the difference in the value of the scholarship awarded. The scholarship program evaluation and grading process is broken down to three distinct elements. An individuals final rating is the composite results of three elements: academic performance, extracurricular activities and essay. The first element is a students academic performance,

which is worth 35 percent of the total. This is strictly the relationship of the students GPA in relationship to the perfect GPA of 4.0. For those academic institutions, which use grading schemes other than a 4-point basis, the students grade is normalized to 4. The second element, which is also worth 35 percent of the total, is the students extracurricular activities while in college. This is the area where all of the applicants accomplishments are noted. It is very important that every accomplishment be included. Sometimes an applicant will note that they were on the Honor Roll or Deans List without mentioning that they were on for three semesters. The difference is that we give credit for every occurrence. The Education Board can only evaluate what is on the application. The applicant should list every extracurricular activity even if they have to append extra pages to the application. The third and final element, worth 30 percent of the total, is the students essay. The instructions tell the applicant to write a brief explanation of, what your academic objectives and career goals are and why you believe some formal training in cost engineering, estimating, planning and scheduling, and project management will be an asset to you in the future. The biggest pitfall that applicants fall into is that they do not properly respond to this question. We on the Education Board look to see that the response is directly related to this question. The essay should be well thought out, clearly written, and incorporate the life experiences of the applicant. Applicants should incorporate their work experience into answering the essay questioneven if they do not have work experience directly in the cost engineering field. Being able to explain how cost engineering is an integral aspect of everyday life can make the difference between a good essay and a top scholarship winner. Normally, applicants for AACE International Scholarships submit their applications to the local sections, however, for students that might be remote from a local section, they can obtain applications from AACE International headquarters or the AACE International website. The website instructs the applicant as to which local section to send the application to, based upon where the applicant goes to school. If you still have any other questions, feel free to contact Charla Miller at AACE International Headquarters (1-800-858COST), who will forward your questions to an Ed Board member, or you can obtain information by sending an e-mail to edchair@aacei.org, who will be happy to respond to your queries. Your efforts in communicating the above information to scholarship applicants will help them prepare their best efforts in obtaining a scholarship and will help the Education Board in seeing that the most deserving applicants receive our scholarships.x
The viewpoints expressed in columns published in Cost Engineering journal are solely those of the authors and do not represent an official position of AACE International.
7

Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003

-NEW CD-ROM-

Cost Engineering 2002

The entire collection of Cost Engineering journals issued in 2002 - articles, columns, and features are now available in one convenient, portable, and searchable place!

Order now at www.aacei.org

easy to use and fully searchable!

Call for Seminar Instructors

Are you interested in offering continuing education seminars for AACE International? The Education Board is always looking for potential instructors: For the Continuing Education Opportunities (CEO) on-site training program, and For the Annual Meeting seminar programs such as the 2004 Annual Meeting, in Washington, DC, June 13-16. Normally one and two-day seminars are preferred. Seminar proposals should be forwarded to AACE International Headquarters.

For information on how to submit proposals for either of these programs, contact Charla Miller, Staff Director - Education and Administration at cmiller@aacei.org. Annual Meeting Seminars will be selected based on the following criteria: Content Will benefit the professional needs of participants Is useful and easily applicable to work place Is leading-edge in the cost engineering/cost management profession Represents a sound and credible curriculum Course Design Based on clearly written learning objectives Has a clearly written lesson plan Incorporates good practices for adult education Instructor Has successfully presented to audiences of cost professionals Can assess and adapt to various knowledge levels and needs of participants Possesses interpersonal and interactive instructional skills Has ability to build rapport with participants Proposal Provides the information requested for evaluation Relevant supporting forms are completed and submitted

DONT HAVE A LOCAL AACE SECTION? WHY NOT VISIT THE CYBERSECTION?!
The CyberSection operates as an open forum which any member of AACE International can join. The CyberSection committee meets the second Thursday of every month at 6 pm, Pacific Time, using Yahoo Groups as the meeting forum. Each month the committee meeting picks up three U.S. time zones. However, anyone can schedule and conduct their own meetings if they can make the regular scheduled meeting. The internet based section can be reached by going to Groups at SBC Yahoo. Signing up to the CyberSection involves getting a Yahoo ID, and then joining the group. The SBC Yahoo service is free and allows AACE to take advantage of current and advancing online meeting technology.Members can also view previously downloaded presentations from the group site files and post messages. Be sure to stop by the CyberSection and say hello!

aaceicybersection-s subscription@yahoo.com
8 Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003

C tificatio Cer ertification Corner

Donald R. Boyken, CCC, Certification Board Member

DACE Joins AACE International in Joint Certification

ACE International and the Dutch Association of Certified Engineers (DACE) have reached an agreement for cross certification. This is a significant step for both certification boards. The AACE International Certification Program has long been recognized as a leader in the industry and this agreement is another recognition of that leadership. AACE International and DACE will jointly administer the certification process of the DACE certification program. There are approximately 200 qualified cost engineers in Holland who, upon completing their paper, will receive the designation of CCE. AACE International's Morgantown Certification Staff shall administer the re-certification process. DACE's current program is a two-year graduate program with work experience. The initial exam and paper (both prepared in Dutch) shall continue to be developed and administered by DACE. This exam and paper will meet the

AACE International guidelines. The re-certification process shall be administered by AACE International. Both organizations benefit from this arrangement. The Certification Boards shall exchange qualified questions to further develop their exam's questions and the Dutch Association gets immediate recognition in their industry as one of the leading organizations. Through this joint certification program, each organization will grow and further develop providing international recognition and acceptance for each organization.x
The viewpoints expressed in columns published in Cost Engineering journal are solely those of the authors and do not represent an official position of AACE International, nor is AACE International endorsing or sponsoring the authors work

Important Announcement About Future Arranged AACE Certification Exams

The AACE International Certification Exam can now be arranged at any time during the year (as well as at AACE International Sections in June/July and December) as long as the following criteria are met: Headquarters Certification Administrator must receive a forty-day advance request for the exam date On-site exams require a minimum of five candidates The proctoring body must be approved by AACE Internationals Certification Board All participant's applications must be in to headquarters no later than 14 days in advance of the exam date. For further information, contact Sandra Willard at: AACE International Headquarters, 209 Prairie Avenue, Suite 100, Morgantown, WV 26501 phone: 304-296-8444 fax: 304-291-5728

Popular Certification Review Course and Examination Come to Denver in December

The four-day certification review course and examination will be held in Denver, Colorado on December 3-6, 2003. This course features detailed coverage of important topics, with extra time allowed for working out sample problems and examples, and plenty of time for interaction with the instructor. The final portion of each day, candidates will take one part of the certification examination. The exam will be in the standard multiple choice exam format. A 2500-word paper will be due at the time of the exam. (Please note, candidates who have not submitted their papers in advance and who do not bring them to the exam site will not be permitted to take the examination.) The cost of this entire package including the seminar with handouts, examination fees, continental breakfast, lunch, and afternoon break each day is only US $1875. Find more details on location and price, and a registration form on our website, www.aacei.org, or call Headquarters with your questions at 1-800-858-COST (outside US and Canada, ++1.304.2968444).
IMPORTANT: The deadline to register for this option is October 24th in order to comply with certification application regulations. Registrants must complete the certification application and submit it with registration. In order to sit for the certification exam, all applicants must meet fundamental certification program eligibility requirements. If you are interested, please contact the AACE Headquarters to ensure you meet these criteria (at least 8 years of professional experience of which up to four years may be substituted by a degree in a related profession).

Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003

T E thics C The he E thics Corner

Dr. Kenneth K. Humphreys, PE CCE

The Challenger Disaster

he ethical engineer must make the hard choice about whistleblowing as Roger Boisjoly did when the Challenger exploded. On January 28, 1986, seven astronauts were killed when the space shuttle Challenger exploded just 73 seconds into the flight. The O-rings on one of the solid rocket boosters failed to seat properly allowing hot combustion gases to leak from the side of the booster and cause a flame which burned through the external fuel tank. Subsequent investigations attributed the O-ring failure to several factors, including faulty design of the solid rocket boosters, insufficient low-temperature testing of the O-ring material and the joints that the O-ring sealed, and lack of proper communication between different levels of National Aeronautics and Space Administration (NASA) management [1]. Texas A&M University (TAMU) [1] summarized the background of the disaster as follows:

[Inc ]was awarded the contract to design and build the SRBs in 1974 The booster is comprised of seven hollow metal cylindersThe joints where the segments are joined together at KSC [Kennedy Space Center] are known as field jointsThese field joints consist of a tang and clevis joint. The tang and clevis are held together by 177 clevis pins. Each joint is sealed by two O-ringsThe second ring was added as a measure of redundancy since the boosters would be lifting humans into orbit. The purpose of the O-rings is to prevent hot combustion gases from escaping from the inside of the motor The SRBs provide 80 percent of the thrust necessary to propel the shuttle into orbit and, about two minutes after launch, are designed to detach and parachute back to earth for use on future shuttle missions. What Happened? Within seconds after the launch of Challenger, puffs of smoke could be seen indicating that the O-rings on the right SRB were failing. In less than a minute a flame was evident. The flame struck the surface of the external tank that contained the liquid hydrogen and oxygen fuel for the shuttles engines. The tank was breached and 73 seconds after launch, Challenger exploded, claiming the lives of the seven members of the crew. Why Did the O-rings Fail? The Challenger mission was delayed because of a weather front expected to move into the area, bringing rain and cold temperatures. Weather forecasts indicated that record-setting low temperatures were probable. TAMU [1] reports what happened next as follows: NASA wanted to check with all of its contractors to determine if there would be any problems with launching in the cold temperatures. Alan McDonald, director of the Solid Rocket Motor Project at MortonThiokol, was convinced that there were cold weather problems with the solid rocket motors and contacted two of the engineers working on the project, Robert Ebeling and Roger Boisjoly. Thiokol knew there was a problem with the boosters as early as 1977 and had initiated a redesign effort in 1985. NASA Level I management had been briefed on the problem on August 19, 1985. Almost half of the shuttle flights had experienced O-ring erosion in the booster field joints. Ebeling and Boisjoly had complained to Thiokol that management was not supporting the redesign task force. The size of the gap is controlled by several factors,

NASA managers were anxious to launch the Challenger for several reasons, including economic considerations, political pressures, and scheduling backlogs. Unforeseen competition from the European Space Agency put NASA in a position where it would have to fly the shuttle dependably on a very ambitious schedule in order to prove the Space Transportation Systems cost effectiveness and potential for commercialization. This prompted NASA to schedule a record number of missions in 1986 to make a case for its budget requests. The shuttle mission just prior to the Challenger had been delayed a record number of times because of inclement weather and mechanical factors. NASA wanted to launch the Challenger without any delays so the launch pad could be refurbished in time for the next missionThere was probably also pressure to launch Challenger so it could be in space when President Reagan gave his State of the Union address. Reagans main topic was to be education, and he was expected to mention the shuttle and the first teacher in space, Christa McAuliffe. The shuttle solid rocket boosters (or SRBs), are key elements in the operation of the shuttle. Without the boosters, the shuttle cannot produce enough thrust to overcome the earths gravitational pull and achieve orbit. There is an SRB attached to each side of the external fuel tank. Each booster is 149 feet long and 12 feet in diameter. Before ignition, each booster weighs two million pounds. Solid rockets in general produce much more thrust per pound than their liquid fuel counterparts. The drawback is that once the solid rocket fuel has been ignited, it cannot be turned off or even controlled. So it was extremely important that the shuttle SRBs were properly designed. Morton Thiokol
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including the dimensional tolerances of the metal cylinders and their corresponding tang or clevis, the ambient temperature, the diameter of the O-ring, the thickness of the shims, the loads on the segment, and quality control during assembly. When the booster is ignited, the putty is displaced, compressing the air between the putty and the primary O-ringThe air pressure forces the O-ring into the gap between the tang and clevis. Pressure loads are also applied to the walls of the cylinder, causing the cylinder to balloon slightlyThis ballooning of the cylinder walls caused the gap between the tang and clevis gap to open. This effect has come to be known as joint rotation. Morton Thiokol discovered this joint rotation as part of its testing program in 1977. Thiokol discussed the problem with NASA and started analyzing and testing to determine how to increase the O-ring compression, thereby decreasing the effect of joint rotation. Three design changes were implemented: that the second seal, in some cases, might not seal at all. Additional changes in the shim thickness and O-ring diameter were made to correct the problem. A new problem was discovered during November 1981, after the flight of the second shuttle mission. Examination of the booster field joints revealed that the O-rings were eroding during flight. The joints were still sealing effectively, but the O-ring material was being eaten away by hot gases that escaped past the putty. Thiokol studied different types of putty and its application to study their effects on reducing O-ring erosion. Shuttle flight 51-C of January 24, 1985, had been launched during some of the coldest weather in Florida history. Upon examination of the booster joints, engineers at Thiokol noticed black soot and grease on the outside of the booster casing, caused by actual gas blow-by. This prompted Thiokol to study the effects of O-ring resiliency at low temperaturesIn July 1985, Morton Thiokol ordered new steel billets which would be used for a redesigned case field joint. At the time of the accident, these new billets were not ready for Thiokol, because they take many months to manufacture. Temperatures for thelaunch date were predicted to be in the low 20s. This prompted Alan McDonald to ask his engineers at Thiokol to prepare a presentation on the effects of cold temperature on booster performance. A teleconference was scheduled the evening before the re-scheduled launch in order to discuss the low temperature performance of the boosters. This Dimensional tolerances of the metal joint were tightened. The O-ring diameter was increased, and its dimensional tolerances were tightened. The use of the shims mentioned above was introduced. Further testing by Thiokol revealed

teleconference was conducted between engineers and management from Kennedy Space Center, Marshall Space Flight Center in Alabama, and Morton Thiokol in Utah. Boisjoly and another engineer, Arnie Thompson, knew this would be another opportunity to express their concerns about the boosters, but they had only a short time to prepare their data for the presentation. Thiokols engineers gave an hour-long presentation, presenting a convincing argument that the cold weather would exaggerate the problems of joint rotation and delayed O-ring seating. The lowest temperature experienced by the O-rings in any previous mission was 53F, the January 24, 1985 flight. With a predicted ambient temperature of 26F at launch, the O-rings were estimated to be at 29F. After the technical presentation, Thiokols Engineering Vice President Bob Lund presented the conclusions and recommendations. His main conclusion was that 53F was the only low temperature data Thiokol had for the effects of cold on the operational boosters. The boosters had experienced O-ring erosion at this temperature. Since his engineers had no low temperature data below 53F, they could not prove that it was unsafe to launch at lower temperatures. He read his recommendations and commented that the predicted temperatures for the mornings launch[were] outside the data base and NASA should delay the launch, so the ambient temperature could rise until the O-ring temperature was at least 53FMarshalls Solid Rocket Booster Project Managercommented that the data was inconclusive and challenged the engineers logic. A heated debate went on for several minutes beforeJoe Kilminster [was asked] for his opinion. Kilminster was in management, although he had an extensive engineering background. By bypassing the engineers, [the project manager] was calling for a middle-management decision, but Kilminster stood by his engineers. Several other managers at Marshall expressed their doubts about the recommendations, and finally Kilminster asked for a meeting off of the net, so Thiokol could review its data. Boisjoly and Thompson tried to convince their senior managers to stay with their original decision not to launch. A senior executive at Thiokolcommented that a management decision was required. The managers seemed to believe the O-rings could be eroded up to one third of their diameter and still seat properly, regardless of the temperature. The data presented to them showed no correlation between temperature and the blow-by gases which eroded the Orings in previous missions. According to testimony by Kilminster and Boisjoly, [the senior executive] finally turned to Bob Lund and said, Take off your engineering hat and put on your management hat. Joe Kilminster wrote out the new recommendation and went back on line with the teleconference. The new recommendation stated that the cold was still a safety concern, but their people had found that the original data was indeed inconclusive and their engineering

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assessment was that launch was recommended, even though the engineers had no part in writing the new recommendation and refused to sign it. Alan McDonald, who was present with NASA management in Florida, was surprised to see the recommendation to launch and appealed to NASA management not to launch. NASA managers decided to approve the boosters for launch despite the fact that the predicted launch temperature was outside of their operational specifications. The rest is history. Boisjoly Blows the Whistle Roger Boisjoly, one of the engineers who had argued so strongly against the launch, had endeavored to do all in his power to work within the system to avert the tragedy but was overruled by a management decision. The damage was done and Boisjoly followed the Code of Ethics by blowing the whistle when he later testified before the Presidential Commission on the Space Shuttle Accident and told what had happened. One year after the accident he related his experiences to faculty and students at Massachusetts Institute of Technology [2]. These are his comments on the tragedy: It was approximately five minutes prior to launch as I was walking past the room used to view launches when Bob Ebeling stepped out to encourage me to enter and watch the launch. At first I refused, but he finally persuaded me to watch the launch. The room was filled, so I seated myself on the floor closest to the screen and leaned against Bobs legs as he was seated in a chair. The boosters ignited, and as the vehicle cleared the tower I whispered that we had just dodged a bullet. At approximately T+60 seconds Bob told me that he had just completed a prayer of thanks to the Lord for a successful launch. Just 13 seconds later we both saw the horror of destruction as the vehicle exploded. We all sat in stunned silence for a short time, then I got up and left the room and went directly to my office where I remained the rest of the day. Two of my seal task-team colleagues inquired at my office to see if I was okay, but I was unable to speak to them and hold back my emotions so I just nodded yes to them and they left after a short silent stay. Boisjoly consistently made ethical choices during his work for Morton Thiokol and NASA. He subsequently revealed what he knew to the Presidential Commission, despite opposing pressure from officials of his company. Weil [3] said, If it is a distinguishing mark of actions labeled whistleblowing that the agent intends to force attention to a serious moral problem, both Boisjolys and MacDonaldss responses qualify. This feature is the foundation of the publics interest in whistleblowing. By bringing such serious problems to light, whistleblowers contribute to protecting the publics welfare. There have been instances of serious moral problems that were well known inside companies but did not get exposed for lack of a

whistleblowerOrganizations offer settings in which problems with potential for catastrophe can slowly ripen and somehow remain unattended to and unexposed even though many people in those settings are aware of the problem. Roger Boisjoly survived this ordeal and made a new career. He subsequently sat for, and successfully passed, the professional engineering licensing examination. He later said, I truly believe from my experience in the Challenger episode that if I had been licensed and threw that code of ethics in [managements] face, I think it would have got them to think (4). In 1988, in recognition of his efforts to avert the Challenger disaster, the American Association for the Advancement of Science presented Roger Boisjoly, PE, with the Award for Scientific Freedom and Responsibility. x Acknowledgment The foregoing discussion of the Challenger disaster is based upon information obtained from , Texas A&M University [1], the WWW Ethics Center for Engineering and Science, and the National Science Foundation [2] and the National Society of Professional Engineers [3].
References 1. The Space Shuttle Challenger Disaster. National Science Foundation Grant DIR-9012252, Departments of Philosophy and Mechanical Engineering, Texas A&M University. Undated. The Challenger Disaster. WWW Ethics Center for Engineering and Science. National Science Foundation. October 4, 1998. Weil. Whistleblowing: What Have We Learned Since the Challenger? Center for the Study of Professional Ethics, Illinois Institute of Technology. National Society of Professional Engineers. Undated. E Kane. Is PE License a Boon to Ethics in Industry? Engineering Times 19(3); March 1, 1997.

2. 3.

4.

This column is adapted from Chapter 12 of the book, What Every Engineer Should Know About Ethics by Kenneth K. Humphreys, PE CCE, Marcel Dekker, Inc., New York. The book provides a more detailed description of the Challenger disaster with photographs and illustrations detailing the failure mechanism.

Cost Engineering journal invites your comments on this article and your suggestions for future Ethics Corner articles. Comments and suggestions may be sent to Dr. Kenneth K. Humphreys, PE CCE, 1168 Hidden Lake Drive, Granite Falls, NC 28630, (828)7285287, Fax - (828) 728-0048, e-mail - icec@ICostE.org
This column was first published as part of the book, What Every Engineer Should Know About Ethics, by Dr. Kenneth K. Humphreys, PE CCE. The book is available for purchase at Section 12 of the AACE International Online Bookstore, www.aacei.org or www.cost.org. The viewpoints expressed in column published in Cost Engineering journal are solely those of the authors and do not represent an official position of AACE International, nor is AACE International endorsing or supporting the authors work. The columns are presented solely for review and informational purposes by our readers, who are encouraged to respond.

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C ERTIFICATION PAPER

Owner Caused Delay Field Overhead Damages

Matthew James Lankenau, CCE
ABSTRACT: This article is written to assist in the quick and efficient calculation of the appropriate compensation due a contractor for an owner-caused increase in the project duration. This article explains the basic calculation of a daily delay rate and relevant factors. The courts have clearly established the requirements to use a total cost claim damage methodology for direct costs. However, field office indirect or field overhead costs are often not treated with the same scrutiny, despite the fact that the same concepts are evident. The total actual indirect cost to date is often used to calculate delay damages, despite inclusion of bid errors or omissions and lack of complete owner causation. The result is that additional project duration is obtained at an inappropriate premium. The owner should be able to obtain additional time at the as-bid rate unless the added scope is materially different than the original contract. This article presumes that the contract does not already establish a daily rate nor makes specific mention of its calculation. This article does not address the allocation of delay responsibility. KEY WORDS: Bids, costs, change orders, claims, contracts, contractors, and owners

management that oversees operations generally is incurred at a fairly fixed rate. Variable costs are those costs which increase with the level of output [4]. For example, the direct material or labor required manufacturing a product such as the amount of plastic or shop labor used to build a widget. The variable cost is dependent on the number of widgets required. The cost of a complete production run is then the sum of the fixed costs assigned to the run, plus the sum of the number of items produced, times their respective variable costs at a level of output [4]. Total Cost = Fixed Cost + (Variable Cost * Number of units) (equation 1) This well-known accounting principle has a simple application to the construction industry. The costs to establish and maintain a project are the fixed costs and those incurred to build it are the variable costs. A Sample Project Estimate and Actual Cost Figures 1-4 with this article show a sample and highly abbreviated budget for a construction project. The first is the estimated costs and the second shows the actual costs. The figures are included to graphically represent project costs. Since the purpose of this article is to define a method to calculate a fair daily rate for an owner-caused project delay, only the relevant costs need to be captured. This fact greatly reduces the scope of the analysis. The process of identifying relevant costs is similar to sorting stone or rock by size, by passes though a set of ever diminishing screens. The material of each different size is isolated by the screening process. In a similar fashion, costs must be screened based on their relationship to management and time. For example, production or one time set-up costs such as project bonding, Subcontractor buy-out, trailer installation, utility connection and mobilization are not time-related and should not be considered. Finally, those time-related costs which are not allowable as defined by contract or reference such as entertainment and lobbying must be excluded.

here is no question that a contracting party is entitled to be compensated for damages resulting from a breach of that contract if:

OWNER CAUSED DELAYFIELD OVERHEAD DAMAGES The unfortunate fact is that the construction industry does not use a standard method to calculate delay costs. What often happens even after extensive debate over allowable costs, a daily rate is negotiated based on incomplete data. The US Federal Acquisition Regulations are generally used as a guide on public work and private work uses the even more ethereal "generally accepted accounting principles" to determine allowable costs. The skills of the negotiators rather than the objective facts frequently rule the day. Often, the entire daily rate matter is handed over to the auditors who emerge from a dark room months later with a thick report and a two-decimal-point, one-sizefits-all daily rate that no project team member understands. This is unfortunate because the relevant data is generally available and maintained in an easy to use electronic form.

the damages are the direct result of the breach; the damages were within the contemplation of the parties at the time of contracting; and the quantum of damages can be proven with reasonable certainty [2].

Although the nuances of the technical specifications are the source of breach of contract disputes on most projects, the increased duration resulting from those disputes is generally one of the largest and most contested cost escalation producers. This escalation is because of a combination of factors, including contractual requirements for staff to track project issues such as labor, schedule, changes, claims, equipment usage, material usage or hazardous material disposal to name a few. Furthermore, the sophistication of contractor facilities and Fixed, Variable Costs and Time the expensive support equipment required Dependent Costs Within the accounting field, costs are to sustain project staff contribute to the usually described as being either fixed or project cost. variable. Fixed costs are those costs which in total do not vary with output. [5]. For example, the cost to buy the land required to build a factory and property taxes are classic fixed costs. Likewise, the

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All costs are shown in figures 1-2. The costs associated with bonds, mobilization, concrete, steel, painting, and cladding, are not relevant because they do not increase measurably by an owner-caused delay. Therefore, only a few costs are relevant to the calculation of an accurate daily rate. These costs are segregated and shown in figures 3-4. If there is any debate over a particular cost's time dependency, the use of a best fit line to plot the actual costs over time and a rational review of their relationship to management clearly show which costs are needed to make a daily delay rate calculation. Furthermore, costs are typically electronically tracked by virtually all competent entities on projects of significant scale and computer programs turn this analysis into a simple and Figure 1Sample Project - Estimated Monthly Project Costs objective task. The Accurate Calculation of the Daily Rate Would it not be fair to merely isolate and sum the time-dependent costs of a project as of the date at the end of the delay and then divide them by the number of days that have occurred on the project to calculate a fair daily delay rate? ( See equation 2). The answer is maybe, but probably not because this approach presumes that: all costs are relevant and allowable; the estimate contained allocations for all of the work required to do the job; all estimated unit costs were adequate to fulfill the contract; the owner is responsible for all increased project costs; there have not been any executed change orders with mark-ups that compensate the contractor for timerelated overhead, specifically or as part of a mark-up on installed work; and no costs incurred prior to the notice-toproceed are included.

Figure 2Sample Project - Total Actual Monthly Costs

As indicated in the initial three part contract damage axiom, discussed in the first paragraph of this article, there is an

Total Time Dependent Costs to Date Project Duration to Date

The Relevant and Unallowable Costs The total-costs-to-date probably includes the costs incurred after the award but prior to the notice-to-proceed (NTP). These are not relevant to the delay period daily rate. For example, the project management expenses incurred before the it is impossible to determine losses NTP should not be included in a calculation of a construction delay period with reasonable accuracy; daily rate because they are not reflective of the bid was realistic; managing the same scope. the costs are reasonable; and Furthermore, the project costs the contractor was not responsible for probably include entertainment or other the costs [7]. unallowable expenses that must be excluded. They are generally not "paid" by the US Federal Acquisition Regulations in the public sector or similar standards on = Fair Daily Rate for Delay Period private work. [6]. objective test for breach of contract damages that must be passed to develop an accurate owner-caused daily delay rate. Furthermore, the courts have established that the total cost claim approach can only be used when four elements are satisfied:
(equation 2)

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Estimated Description PM Salary Actual Description PM Salary Unit Price $ 15,000 1 Units 1 Budget $ 15,000 $ 15,000 2 $ 15,000 Unit Price $ 12,500 Units 5 Budget $ 12,500 1 $ 12,500 2 $ 12,500

Periods 3 $ 12,500 Periods 3 $ 15,000 4 $ 12,500 5 Estimated $ 12,500 $ 62,500

4 $ 15,000 Variance

5 Actual $ 15,000 $ 75,000 $(12,500)

Table 1Sample Project - PM Salary

Uncontemplated CostsA Time Related Unit Price That Is Underestimated In The Bid If all of the time-related costs are included, it presumes that all costs are the fault of the owner and a complete

extrapolation is foreseen by the owner. This may not be true. In the included example, the project was bid based on a project manager with a salary of $12,500/month and the only one available required a salary of $15,000/month.

Figure 3Estimated Time Related Monthly Costs

Figure 4Time Related Monthly Total Actual Costs

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Therefore, it would probably not be fair to charge the owner for the contractor's failure to "buy out" its project manager at the estimated rate, because it would result in a $2,500 monthly increase in payment of the estimated price during any period of compensated extension. This cost also fails under the "bid was realistic" total cost claim element. However, if the owner was the exclusive cause of the lower priced project managers unavailability, this cost might be considered. Examples: the owner would not approve the lower priced project manager even though they were qualified or the notice to proceed was delayed by the owner. There are many entities that will argue that the owner should pay the actual cost of any time related item regardless of the buy out gain or loss on its rate. "All that is necessary, in order to charge the defendant with the particular loss, is that it is one that ordinarily follows the breach of the contract in the usual course of events or that reasonable men in a position of the parties would have foreseen as a probable result of the breach." [1]. This "but for" approach superficially seems appealing. The argument goes something like "but for" the owner delay, the contractor would have not incurred any additional costs. Therefore, the contractor should not suffer a loss because the entire delay is owner-caused. This opinion has some merit. If a delay is unreasonable or because of the fault or neglect of the government (for public work), delay damages are recoverable [3]. The first problem with this argument is that the owner cannot foresee that a contractor had material bid errors and that performance of additional time related work will require a premium over the as-

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Contracts should be implemented in an internally consistent manner. The owner should expect that short-term duration increases should be completed at the same price as base contract work, just like small changes in scope. An owner should be able to extrapolate the as-bid overhead price for short-term project increases to fairly compensate the contractor for overhead in the same manner as is done for small amounts of installed work. However, long term increases in scope of work and duration should be reviewed and adjustments should be made if the duration increase is too long or requires materially different efforts. The determination of "too long" or "materially different" should be based on the project's characteristics. A reasonable standard is that a 10 percent to 25 percent increase in duration should be extended at the as-bid rate. A contract with a "unit price adjustment clause" sets a reasonable presumption of the cost to manage or install additional work. The argument that project prolongation periods are not bound by the as-bid project becomes unreasonable after relatively little extrapolation. Is it reasonable for an owner to cause a one month delay on a job with a $14,200/month overhead for the as-bid contract duration and expect to pay, $15,000, $20,000 or $30,000/ month for a one month extension if there is no material difference in performance? Yet, many construction claims price extended work at two to three times the as-bid rate. Therefore, cost items with unit price variances between the as-bid and "claimed" rates should be isolated and negotiated Uncontemplated CostsUnit Price individually. Fairness, foreseeability, and Adjustment Clauses Additionally, many contracts contain consistency demand that short-term an extra work clause that says something contract duration increases should be completed at as-bid rates. Therefore, when like: the bid unit rate for any time-dependent cost of a project is less than the claimed "for any increase in installed work rate, the "claimed premium" should of any line item within 25 percent probably be deducted from the total cost of of the as-bid amount, the unit the time-related costs to determine the price for the extra work shall basis for the daily rate. remain the same as the as-bid unit price. The work in excess of 25 Uncontemplated CostThe Omission of percent of the as-bid quantity shall Time Related Contract Work in the be performed at a negotiated rate." Estimate Another source of inaccuracy of the This means that the owner will pay for small increases in installed work at the total cost approach is the presumption that the bid contained allocations for all of the same price as the bid price. bid rates. Therefore, a reasonable owner would not expect that a modest delay would require a higher rate of compensation for the extended period than the as-bid period. Other entities will argue the owner is free to contract with whomever he or she chooses and if they do not like the delay rate, then they can get someone else to do the work. The freedom to contract for extra, yet integral, work is an illusory concept. It is commercially impracticable to have a new and outside entity contract for this type of work. The facts are that the existing project staff has mobilized and gone through a project-specific learning curve. They can generally perform modest amounts of additional work at a lower cost than a different team. This is because of a number of factors including the cost to solicit, review, and contract with a new party and the project specific information gained by the existing teams performance to date. Therefore, modest increases in scope will generally be more expensive with a new staff than merely using the existing staff, if they are available at reasonable rates. Finally, warranty and liability issues nullify the argument that a separate party can complete extra and integral work and provide a project with the same postconstruction performance characteristics as a job completed by one party. Commercial practicality demands that the contractor and the owner are inextricably tied at the hip when it comes to the performance of minor amounts of integral and extra work.

effort required to complete the project. This is also not always the case. In the included example, the actual cost records reveal that the price to provide an administrator was $2,500/month. However, upon review, it is found that the estimate did not include this cost and it was clear that one was required. If all of the costs were merely summed and divided by the duration to date, it would yield an excessive result. However, based on the argument that "but for" the owner-caused delay, the additional cost would not have occurred, many entities will argue that the contractor should probably be paid for the cost to provide a contractually-required item in the extended period, even if they failed to do so in the bid in a similar manner as variances in rates. But again, fairness is a two-edged sword and short periods of delay without material variance in performance requirements should probably be done at as-bid rates. An owner cannot foresee bid errors and should not expect an increase in the daily rate over the as-bid rate for modest increases in project duration. Uncontemplated CostsOverhead Rate Variations Although many accountants determine one daily rate for any period of delay in a project, the fact is that different portions of the project require different management efforts at different costs. For example, during the middle portion of the project the staff and cost per day is probably the greatest. Conversely, the "punch list" or "completion-phase of a project requires a significantly smaller staff and costs of performance are reduced. One of the most common errors comes from project support equipment that is included but is not used during the period of delay. For example, the cranes used in the middle of the project should not be included in the daily rate, if the delay occurs in a period they are not onsite. Therefore, the point of the project when the delay occurs should be considered if it materially impacts the rate of payment. he calculation of a fair daily rate for a period of owner-caused delay is not that elusive. The simple process is to sum all of the time-dependent costs to date and subtract those costs which

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are either not allowable, not reasonable, or not owner-caused and divide by the project duration-to-date. If there is any debate over a cost item's inclusion, then plot the cost against time and review its relationship to the management of the project. Those actual categories of costs either omitted from the bid or underbid should be isolated and reviewed on a case-by-case basis with a strong bias toward using the asbid rates for short periods of delay. The process to establish an accurate delay rate is to ask the following questions. What was included in the bid for all of the field and office overhead on the project? What are the specific field and home office cost items included in the bid? What individual field and home office cost items are time-dependent? What is the delay period? How much of the project delay was exclusively caused by the owner? (Compensable). What were the total field and home office costs on the project before the delay? What were the total field and home office costs prior to the notice to proceed? Was there any material overhead performance requirement variance between the as-bid period and the delay? What individual cost items were not bid that are included in the total field and home office costs on the project?

What individual cost items were not ABOUT THE AUTHOR bid at the same periodic rates that are included in the total field and home office costs on the project?

Matthew Lankenau, CCE, has a BSCE from Purdue University, a MBA from California State University and a Juris Doctor from Pacific West School of Law. He has worked for Charles Pankow Builders,one of the nations largest commercial design-build contractor, URS, an international construction and engineering services firm he is one of the original shareholders at PinnacleOne which provides expert witness and construction management consultants to the construction industry. He has provided construction management or expert witness services to clients constructing airports, commercial buildings, educational facilities, highways, ports, light and heavy rail projects and wastewater treatment plants. Mr. Lankenau has testified at trials as an expert witness on construction management issues and at numerous mediations on cost, schedule, contract interpretation, and REFERENCES performance issues. Mr. Lankenau has also been published in the Construction Specifier 1. 5 Corbin on Contracts Section 1010, 79 on the subject of rebuilding our schools. (1964). 2. 22 Am.Ju.2d, Sections 453-463. 3. Clarke, Government-Caused Delays in the Certification Papers - Each candidate seeking Performance of Federal Contracts: The certification as a Certified Cost Consultant/ Certified Cost Engineer (CCC/CCE) is expected Impact of the Contract Clauses, 22 to write a professional paper of a minimum of 2,500 MIL.L.REV 1 (1963). words on a cost engineering-related subject and 4. Ibid, page 527. must be submitted before or at the time of the 5. McConnell, Campbell R, Economics - examination. Published are some of the top scoring Principles, Problems, and Policies, 10th entries as an example of what constitutes a good entry. Other members and readers will also gain Edition (1987): 526. 6. Title 48Federal Acquisition Regulation insights on current industry trends and projects with the publication of these papers in the Cost System, Chapter 31.205 Engineering journal. 7. WRB Corp. v United States 183 Ct. 409 (1968).

Also, the following items need to be done. segregate the costs by time dependency; segregate the time dependent costs with a variance from the as-bid rate; remove those costs not included in the bid; remove those costs compensated by change orders; remove the costs that are not allowable; deduct the inappropriate or unreasonable costs from the total costto-date; divide the result by the duration to date; and multiply the result by the period of extension. x

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Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003

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T ECHNICAL A RTICLE

PEER REVIEWED

Schedule Delay Analysis: Modified Windows Approach

Kirk D. Gothand, CCC
ABSTRACT: The schedule analysis methodology outlined in this article has been successfully presented by the author on six contract disputes in the past two years involving schedule impacts. In each dispute, the methodology was used and outlined in the analysis narrative. As outlined in this article, the claimants own schedule delays were identified and quantified easing the defendants concern that concurrent delays were accounted for. In all the cases, the resulting schedule analysis was agreed to and was unconditionally accepted by both parties. Knowing that the schedule review was creditable, the parties settled the disputes through meaningful negotiations and did not resort to costly arbitration or litigation. This article provides a brief description of what events lead to a dispute and the importance of the schedule analysis to support the claimants damage complaint. This part of the article is brief and is not intended to describe all possible events that could lead into a dispute. The dispute example was used to give the reader a background of the financial importance of construction claims to the claimants future and the necessity of a schedule analysis. The article provides a detailed methodology to the modified windows approach for the analysis. The schedule analysis presented in this article is based on creditable schedule analysis technique currently used to analyze schedule delay and is modified to separately analyze claimant schedule delaying events. The modified technique usually results in a quick and acceptable resolution for both parties through meaningful negotiations. However, such a detailed analysis is expensive, time consuming, and may not support a claimant's recovery request. Additionally, if the documents reviewed don't adequately detail the facts of project delaying events, the schedule analysis may not reflect the actual events that unfolded during the course of a project. Resulting in the defendant rejecting the schedule analysis, compromising the credibility of the analysis, and causing the claimant to invest additional costs making the corrections. However, the Windows technique outlined in this article provides a good basis for meaningful negotiations. KEY WORDS: Construction claims, scheduke analysis, and delays

SCHEDULING AND PLANNING THE PROJECT A project plan is essential to a company's financial future and growth as in an individual's own finances. People tend to plan their daily activities to efficiently utse their time, such as at what time they rise in the morning, the duration needed to get to work on time, etc. Over a period, this process is repeated many times, that people planning their daily activities are unknowingly scheduling their lives. The same practice is used by business' to efficiently and effectively plan their operations, to maximize profits. Select companies have recognized the power of planning to profitability and adopted project planning into their corporate procedures. Stanford research institute performed a formal study and concluded that companies that supported planning have shown superior growth rates as compared to companies without such programs [1]. In order to effectively plan and schedule a project, the planner must be familiar with the basic planning tools and scheduling techniques including, but not limited to, the following [1]. standard company operating procedures; historical databases; checklist to support planning; model plans or repeated types of work; and familiarity with project requirements and installation methods (i.e., estimate, work breakdown structure (WBS), etc.)

onstruction claims have been used as an avenue for contractors to recover damages for as long as public contracting has been in existence. The key to a contractors (claimants) success is a detail and in-depth review of the schedule delays and events to support damage calculations. Varying schedule analysis techniques have been used and developed over the years, ranging from the simple bar chart review used before the computer age, to the sophisticated, time consuming, and costly detailed schedule analyses that computers and software technology advancements allow today. This article will address in summary the importance of the construction claim, how and why it's needed, and the critical importance of the schedule analysis. It also provides recognizable common schedule analysis techniques used and accepted in the construction industry. The article will detail a technique that is based on a proven and impartial

schedule analysis technique, with a new modification to identify the magnitude of schedule impacts, the magnitude of concurrent delay experienced and details the events that caused the schedule delays. Its important to recognize that when a construction claim for schedule impacts is The planner is a catalyst who chairs submitted, the relationship between the claimant and defendant will be tested with the planning activity, and therefore is not credibility becoming the largest hurdle for an individual who knows every aspect of the parties to overcome. Typically, the the project, but is an individual who can schedule analysis will be met with the organize the thoughts of various people [1]. The planner must also be a person that highest scrutiny. In order to gain effectively communicate the credibility in the mind of the defendant, can the claimant must account for its own milestones and goals of the plan, and schedule delay events and consequences. reporting back to the people who provided The schedule analysis methodology various schedule elements, keeping in outlined below will be creditable mind that these individuals will implement [emphasis added], with the claimant the plan and will directly affect the recognizing and accepting responsibility of profitability of the project. The key to an effective plan is the success and its own problems. adaptability of the planner to collect, organize, and translate the schedule activities into an easy to understand format.

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manually, it has become necessary to perform detailed schedule analyses and the simple bar chart method no longer applies. The time of contract performance has The listing below is a brief description of a direct effect on profitability of the project. schedule analyses that have been The schedule plan can be defined as developed and accepted over the years. making decisions now with the objective of Impact Method [3]: influencing the future [1]. Since the future Global Simplistic and easy to present, is based upon time of contract represented by a narrative. Often an performance, and since time influences inaccurate way to depict the impact of money, it is reasonable to conclude that delay causing events. Total delay is planning influences profits. When the purported as being the sum total of future is jeopardized by delays and/or durations, ignoring concurrency, impacts to the schedule, profitability is scheduling errors, and changes to the jeopardized. A thorough in-depth schedule as-built schedule, and assumes that all analysis is required to determine the affects occurrences affected the critical path. to the planned duration of the schedule Impact Technique [3]: and to detail the events that caused delay to Net Simplistic and easy to present. Bar the critical path. A projects duration and chart or CPM schedules illustrating critical path are directly relational and are the planned baseline schedule and astypically the same duration as the critical built schedule. The schedule plot path sets the completion date of the shows all delays, disruptions and project. The critical path can be defined suspensions on the as-built schedule, as, "the longest path through the network argues that the only logical conclusion that establishes the minimum overall is that the overwhelming effect has project duration" [4]. Contracts are written delayed the project, and forms the to allow parties to recover legitimate basis for a time extension for delay damages provided that certain between the planned completion and requirements are fulfilled. If a contractor actual completion. The schedule does not deliver the project within the analysis ignores concurrent delay contract performance period, the owner events, claimant errors, scheduling may impose liquidated damages. For errors, and changes to the as-built instance, if the contractor has been delayed schedule. by actions of the owner a time extension and an equitable adjustment for damages As-Planned CPM Technique [3]: Common and simplistic technique experienced from those delays should be used to show delay to the as-planned granted. In both instances, a detailed schedule only. Various delays, schedule analysis is required. When a disruptions, and suspensions are detailed schedule analysis must wait until presented as events with durations and the end of the project for some reason (i.e., added to the baseline schedule dispute between contracting parties, delay including appropriate sequence. The was not quantifiable until completion, baseline schedule is allowed to contracting parties could not agree to calculate with the delaying events and quantify delay, etc.), various types of the claimants time extension is the schedule analyses can be used to quantify duration between the planned length of delay and identify the events that completion and the new impacted caused delay. planned completion. The technique does not consider the as-built TYPES OF SCHEDULE ANALYSES schedule, status of the schedule when delays occurred, and assumes that the Over the past few years, scheduling claimant is not responsible for analyses have evolved and developed from concurrent delay. The fatal flaw of this the basic global method used in the infant technique is that actual sequence and stage of bar charts to the Windows progress may have been significantly schedule analyses used today. With the different from the planned schedule. advent of the computer generated CPM scheduling program, and its ability to "But For" Analysis Using As-Planned CPM [3]: Uses same premise as the perform multiple schedule calculation "As-Planned CPM Technique" but within a fraction of the time it took INTRODUCTION TO SCHEDULE DELAYS

chooses events for which the claimant is willing to accept responsibility, and inserts the delaying events into a baseline schedule. The "but for" technique adjusts the as-planned completion date for delays that are clearly the claimants responsibility and assumes that the differences between the adjusted as-planned and actual completions are responsibility of other party, forming the basis of the schedule delay. The technique is as equally flawed as the "as-planned CPM technique," and ignores the status of the schedule when the events occurred and that the actual sequence and progress may have been significantly different from the planned schedule. Collapsed As-Built Method [3]: Technique is more difficult than the techniques used on baseline schedules. The method purports to address concurrent delays by removing delays from the as-built schedule and collapsing it. Durations of delays are usually arbitrarily established; a process often manipulated to cover up the effect of a claimant's delay and does not consider changes to the critical path. Impacted As-Built CPM [3]: Technique is similar to "collapsed asbuilt method" except that the as-built schedule progress is removed and the as-built schedule is developed in CPM format. Delaying events are identified and depicted in the as-built schedule as distinct activities, which are then tied to specific work activities by constraints. The critical path is determined twice, once in the asplanned schedule and again at the end of the project. Claimant requests schedule extension for time between the as-planned completion and asbuilt completion or the impacted asbuilt CPM completion. If the impacted as-built completion date is earlier than the planned completion date, the claimant will claim that it is a result of constructive acceleration. The technique is flawed to the point that the critical path calculation is somewhat contrived since the calculation is after the fact and is calculated only twice. Time Impact Analysis [3] (Windows Method): Notably recognized as the

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most creditable schedule analysis of all techniques addressed above and the topic of this article. The method is time consuming, costly, and quantifies the impact of delay causing events through an examination of the project status at certain times. The goal is to develop a snap shot picture of the project each time it experiences a major impact to the CPM schedule and accounts for the dynamic sequence of events and actual project history and compares impacts between the periodic snap shots. Fragnets (mini-schedules) are developed to indicate affects of the events not anticipated by the original schedule. A comprehensive time impact analysis will likely demonstrate the day for day increase to completion date, consumption of float, concurrency with another delay, recovery of time by acceleration or resequencing and accurately simulates project history. The goal is to examine the impacts as they occurred considering the status of the schedule during those times. The method outlined below is based upon the Windows Method (time impact analysis) stated above, and has been modified for use in the construction industry. SCHEDULE ANALYSIS METHODOLOGY The project CPM schedule is a dynamic tool for analysis of a claimants planned work sequence in light of progress achieved and including changes, which might affect a claimants ability to follow its original plan. During the course of construction, the critical path of the project may shift from one series of activities to another because of progress or defendant caused impacts, disruptions, and changes. In addition, during the course of the project, the amount of float applicable to a particular series of activities will change. This is particularly true of a series of activities that begin with a great deal of float. As a project progresses, a claimant concentrates its efforts on the most critical work activities to the completion of the project while using the float in the schedule to allow efficient application of available resources. This process takes place on a project regardless of whether the

project CPM is updated with changes to the schedule or not, because superintendents are trained to prioritize their work according to the most critical activities. They are also able to pace themselves where their efforts would not improve the completion of the project. For the superintendent, the relative criticality of a particular activity is obvious to him/her because of years of experience in construction. Superintendents know it is not cost effective to run "full throttle into a brick wall." Therefore, they will assign resources at a level, which will allow an even flow of the work. The Windows Method schedule analysis ideally can be followed during the course of construction. But the method provided below is used for an "after the fact" claim submission at the end of a particular period of performance or at the conclusion of the project for reasons out of the claimants control. Fortunately, the validity of this analysis technique is not diminished because the analysis is performed after the fact. The steps involved in a windows method schedule

analysis are shown in figure 1 and are as follows. Step 1 Establish the Project Baseline ScheduleThe baseline schedule needs to be reviewed and determined if it is acceptable for use as the baseline schedule for the modified windows schedule analysis technique. The contract between the claimant and defendant needs to be reviewed to determine that: The baseline schedule structure follows requirements outlined in contract documents which could state maximum duration of activities, constraints to be incorporated, work breakdown structure, etc. Contract performance period is not exceeded. Required milestones are included. Notice to proceed is accurately scheduled. Includes all submittals needing defendant approval, including adequate review durations, fabrication

Step 1 Establish Baseline Schedule Step 2 Establish Planned Durations Where Reasonable, Remove Open Ends and Constraints Step 3 Identifying Delaying Events and Develop Fragnets Step 4 Insert Fragnets Into Baseline Schedule to Produce Impact Schedule Step 5 Note Claimant and Defendant Caused Impact/Disruption Step 6 Update Impact Schedule for Progress Step 7 Note Any Improvement or Loss Attributable to the Claimant Step 8 Repeat Steps 3-7 for Each Analyzed Period
Figure 1Modified Windows Schedule Analysis Steps

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Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003

INTERIOR FRAMING
947 COE Response to DCVR 10

RD=5 Interior Framing RD=3 253 RI Wall Electrical RD=17 39 CD DELAY 947 COE Response to DCVR 10 RD=18 969 JC CID VR 10 Proposal 3 970 COE - Contract Mod 5 971 DC VR 10 CLG Framing 10 Interior Framing RD=3 253 RI Wall Electrical RD=17
Figure 2Top Bar Reflects Baseline Schedule, Bottom Bar Reflects Results of ImpactFragnet

durations, procurement durations and delivery durations. All project work to achieve completion has been included as schedule activities and in the work breakdown structure. It's important that all work, even though it's not critical to completion be included in the schedule and not just simply ignored based on importance. Include adequate administration activities.

The schedule analysis starts with an accurate baseline schedule and the schedule analyzer should take the time necessary to demonstrate that the baseline was a good plan intended for project completion. If inaccuracies are discovered, correction is required and the analyzer should detail those corrections in the Step 3 schedule review narrative. See figure 1. Identify Delaying Events and Develop FragnetsThe next step in the process is Step 2 to identify schedule delay-causing events, Establish that Planned Durations were which began in the current scheduling Reasonable and Remove Open Ends and period and are likely to affect the schedule ConstraintsSchedule durations are in a significant way. Schedule fragnets or followed as closely as possible during the mini-schedule networks are developed for construction of a project. If durations have each event including durations, constraint been inadequate throughout the project, it dates, and appropriate logical relationships. Careful consideration of the claimant gives reason that the claimant did not adequately plan the work and the delay event should be considered to add defendant will reject any schedule analysis credibility to the schedule review. At this that supports delay. The schedule analyzer point of the contract record review, should check schedule durations, paying claimants tend not to accept responsibility close attention to the critical path activity for their delay events because they believe

durations. The estimate should be considered to provide quantities of work and estimated hours of performance; however, durations can be obtained using other publications such as RSMeans to provide performance durations if quantities are known. If durations are deemed to be inadequate and require correction, the analyzer should make the durations increases and detail the changes in the schedule review narrative. Open ends that are found need to be corrected with the appropriate logic in order to avoid inaccurate schedule calculations that may affect the critical path. Constraints need to be reviewed and removed if determined that they are not required or have been used to unjustly influence the critical path.

that if it were not for the defendants delaying event, they would not have delayed the schedule. If the claimant does not identify its delays, the defendant will reject the schedule based on the concurrent delay defense, forcing a dispute, and requiring additional schedule analysis. Step 4 Insert Fragnets Into the Baseline Schedule to Produce the Impact ScheduleFragnets are inserted into the logic of the baseline schedule for each period analyzed. The baseline schedule contains progress to the beginning of the period analyzed [emphasis added] and includes fragnets developed from prior periods. Step 3 determined the schedule delay fragnets and the responsible party (i.e., claimant or defendant). If it was determined that the claimant and defendant are both responsible for delay events for the period, the delays need to be analyzed independently to determine concurrent delay and the longest delay to the completion of the project. Start with inserting all claimant delay-causing event fragnets into the baseline schedule to determine the effects on the CPM schedule completion date. Copy that schedule and insert defendant delaycausing events and determine the affects on the CPM schedule completion date. If delay-causing events for the period reviewed have been determined to be the

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sole responsibility of the defendant, then the step associated with inserting claimant delays and copying the schedule can be skipped. Figure 2 shows how a schedule fragnet is developed and inserted into the baseline schedule and the result of the delay. Step 5 Note Claimant and Defendant Caused Impacts/DisruptionsAt this point, the reviewer has defined three important dates which are: Baseline Impact Schedule Completion Date (BSCD). Represents scheduled completion date for prior period without delaying events included from the analyzed period. Claimant Impact Scheduled Completion Date (CSCD). Represents claimant delaying events and the resultant completion date. Defendant Impact Schedule Completion Date (DSCD). Represents defendant delaying events and the resultant completion date.

At this point the dates are recorded and concurrent delay (CD) and the schedule delay (SD) can be calculated as shown in figure 3. "Concurrent delay occurs when both the contractor [claimant] and owner [defendant] delay the project or when either party delays the project during an excusable but noncompensable delay (e.g., abnormal weather). The delays need not occur simultaneously but can be on two parallel critical path chains" [12]. The resultant CD and SD are entered into a summary table to track the delays. It is also important to include in the narrative a detailed description of the fragnet development as stated in step three, including where the information was attained (i.e., daily reports, change order logs request for information, design verification requests, and any other documents that will justify the fragnet

developed), what events were considered the claimant saves time and losses time on and include any other information that is the critical path. necessary to the credibility of the analysis. Step 7 Step 6 Note Any Improvement or Loss Update Impact Schedule For Progress Attributable to the ClaimantThe end After the impacts to the CPM schedule of the analysis for any given period have been analyzed and the impacted analyzed is to note any improvement or completion date, concurrent and schedule loss along the project critical path as delays have been identified (steps 3 and 4), identified in step six. The information is the impact schedule needs to be updated to entered into the schedule analysis narrative reflect how work was performed during the under the title update schedule. Include period analyzed. Updating the schedule an overview of progress achieved during includes applying progress to activities the period, paying close attention to the worked during the period analyzed (i.e., critical path progress, logic changes, and actual starts and finishes, if activities did work scheduled for the next two weeks. not finish during the period then a percentage completed or remaining duration must be used), making necessary Step 8 logic revisions, constraint revisions and any Repeat Steps 3-7 For Each Period other necessary changes so that the When steps 3-7 are completed for any schedule reflects the claimants plan to given period, the reviewer will have developed impacted schedule fragnets for complete the work. After updating the schedule for delay events, determined the responsibility progress and appropriate logic changes are of schedule delays, determined concurrent made the schedule is recalculated. The and schedule delays, and updated the resultant value of float on the critical path schedule to reflect progress. Steps 3-7 are will indicate whether the claimant repeated for each period of the project in improved on its planned schedule or time sequence. In this way, the analysis for each is lost for reasons not identified on the successive period builds upon the analysis impact schedule. When the claimant is of all preceding periods. able to improve on its planned duration of TABULATE SCHEDULE DELAY critical path activities, the time saved indicates that the claimant possibly By sequentially following the above accelerated its critical work, however this cannot be determined without further process, the claimants own progress is review of the contract records. Conversely, weighted against its plan to determine any if the claimant looses time against the schedule delay and segregate defendantplanned duration of critical path activities, caused delays to the project CPM schedule this time is charged against the claimants completion date. These results are then account and indicates that the claimant tabulated on the monthly schedule analysis delayed the schedule completion. These narrative score card to show the cumulative losses can be attributable to performance effect of defendant extensions to the inefficiencies, moral problems, lack of completion of the project. The score card will also track claimant planning and following the plan, etc. Figure 4 demonstrates the scenarios when schedule completion improvement/loss throughout the schedule analysis.

10 11 12 13 14 15 16 17 18

IMPACT SCHEDULE Concurrent Delay CD = CSCD - BSCD Schedule Delay SD = DSCD -BSCD UPDATE SCHEDULE
Figure 3Concurrent Delay and Schedule Delay Calculations
22

Claimant Gain UPDATE SCHEDULE Claimant Loss

Figure 4Represents Claimant Gain or Loss Determined in the Update Schedule

Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003

Schedule completion improvement may be the result of constructive acceleration, claimant resequencing of schedule activities, or the claimant simply doing better than his plan. Claimant loss of time may be the result of production inefficiencies. SCHEDULE ANALYSIS NARRATIVE The schedule analysis narrative will focus on the significant changes and developments in the project schedule, which have been identified in the impact schedule analysis (steps 3 and 4) and the update schedule analysis (step 6). First, the narrative should discuss the methodology used to analyze the schedule and its pros and cons [emphasis added], second the narrative should address the reviewers findings regarding the review of the baseline schedule and any correction needed, and the last section of the narrative makes up the actual schedule review (impact and update schedules) for each period analyzed. For each period analyzed, the narrative should be broken down into two sections, each with a conclusion. The first section should be titled, "impact schedule analysis" and the second section "update schedule analysis", and include the information that has been discussed in steps 3-7. he goal of all schedule analyses is to determine delays and impacts to the schedule. However, the ultimate problem with all schedule analyses is that the defendant regards them as being manipulated by a claimant to emphasize defendant delays while downplaying or ignoring claimant delays. The claimant usually takes the position that if it had schedule delays, it was a result of defendant disruption, hindrances, and schedule delays. Therefore, the claimant excludes or ignores its own schedules delays and does not analyze the schedule for its delay-causing events. When this happens, a defendant typically deems the analysis as being inaccurate and rejects the entire schedule analysis stating that concurrent claimant delays have not been considered and analyzed. By following the modified Windows schedule technique outlined above, all delaying events are investigated fully, all record documents are listed to support the methodology, schedule delaying events

are detailed as schedule delay fragnets and inserted into the project CPM schedule, responsibility for claimants and defendant delaying events are assigned and the magnitude of delaying events are calculated. The most important part of the analysis is that claimant concurrent delays are determined, magnitude calculated, responsibility claimed and presented in a format that is easy to understand. For the claimant to present a schedule analysis to the defendant that includes its own delays will add credibility to the schedule analysis and open the door to meaningful negotiations and quick resolution to the dispute. x
REFERENCES 1. Janzen, M.W. Planning and SchedulingIntroduction to Planning and Scheduling. Cost Engineers Notebook Vol. 2, AACE International (March 1995). Bramble, B., and A. Phillips. Construction Litigation: Strategies and Techniques. Chapter 5, Presentation of Delay and Acceleration Claims, New York: Wiley Law Publications. John Wiley & Sons. Pinnell, S. How to Get Paid for Construction Changes: Preparation, Resolution Tools, and Techniques. Chapter 10, Analyzing Schedule Delay and Acceleration, The McGraw-Hill Companies, Inc., 1998. Construction Planning & Scheduling. Chapter 6, Network Schedule Calculations, The Associated General Contractors of America. Publication Number 3500.1 (1997).

ARTICLES AVAILABLE
Articles published in previous editions of the Cost Engineering journal may be purchased individually through the AACE International Online Bookstore at AACE Internationals website, www.aacei.org. The cost per article is US$7.50 for nonmembers and US$5.50 for members of AACE International. If you are interested in purchasing additional copies of articles appearing in this issue please refer to the Article Reprint and Permissions information on page 42.

2.

3.

4.

23rd Annual Fall Seminar East Tennessee Section of AACE International Oct. 20-22, 2003 Knoxville, TN
The East Tennessee Section of the Association for the Advancement of Cost Engineering International will present a 3-day seminar for cost professionals Oct. 20-22. The seminar will open on Monday, Oct. 20, with technical presentations and a keynote address by JoelKoppelman, CEO of Primavera Systems. On Tuesday, Oct. 21, and Wednesday, Oct. 22, there will be seminar classes. For more information, visit Website at www.aace-ets.org

Recommended Reading 1. AACE Internationals Certification Study Guide. Second edition. Morgantown, WV. AACE International (1999). AACE Internationals Skills & Knowledge of Cost Engineering. 4th edition. Morgantown, WV. AACE International (1999).

2.

Technical Articles - Each month, Cost Engineering journal publishes one or more peerreviewed technical articles. These articles go through a blind peer review evaluation prior to publication. Experts in the subject area judge the technical accuracy of the articles. They advise the authors on the strengths and weaknesses of their submissions and what changes can be made to improve the article.

Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003

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The AACE International

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Program only open to AACE members in good standing. Coupons only good toward AACE products, gifts, and services. 2 The amount of the coupon will be prorated based on the annual dues rate for the member recruited, as determined using World Bank's income classifications, and listed on the AACE International membership application. For those recruiting members from Group A countries (annual dues US$115) the coupon issued will be redeemable for US$20; for Group B countries (annual dues US$83) the coupon issued will be redeemable for US$15; for Group C countries (annual dues US$65) each coupon issued will be redeemable for US$10; for US Student Members (annual dues US$25) the coupon issued will be redeemable for US$5. Corporate Sponsorships are excluded. 3 Top Recruiters will be selected May 1. 4 If the Grand Prize winner is unable to attend the current years Annual Meeting, this prize can be deferred to the following years Annual Meeting. 5 Certificate good for AACE products only. 6 A reinstated member is one who has not been a member of AACE International for at least one year.
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Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003

T ECHNICAL A RTICLE

PEER REVIEWED

Best Owner Practices for Project Control

John K. Hollmann, PE CCE
ABSTRACT: For the past several decades, owner companies have been reorganizing, reengineering, downsizing, and, at times, eliminating their in-house cost engineering function in a drive to improve cost competitiveness by reducing what company management perceives as overhead. Capital program managers, hoping that these actions would improve cost outcomes, have largely been disappointed. In this article, a better approach than cutting and blind outsourcing is described; an approach that uses the best owner cost engineering practices to ensure competitive outcomes. The approach has been demonstrated to work through quantitative research of empirical industry data. KEY WORDS: Benchmarking, best practices, and cost and schedule outcomes

or the past several decades, owner companies have been reorganizing, reengineering, downsizing, and, at times, eliminating their in-house cost engineering function in a drive to improve cost competitiveness by reducing what company management perceives as overhead. Capital program managers, hoping that these actions would improve cost outcomes, have largely been disappointed. In this article, a better approach than cutting and blind outsourcing is described; an approach that uses the best owner cost engineering practices to ensure competitive outcomes. The approach has been demonstrated to work through quantitative research of empirical industry data. Independent Project Analysis (IPA) research, as reported in industry literature in 1994, had shown that average cost growth (the ratio of actual/estimated costs) for projects was declining. However, more recent research has shown that since 1994, neither average cost growth nor variability (the plus or minus range) has improved [4, 2]. Past improvements in average cost growth were largely driven by improved upfront project definition, prior to full authorization of project funds (i.e., frontend loading or FEL). However, good FEL can improve the cost outcome only so much before weaknesses in other practices become a constraint. Owner cost engineering/project control practices used during the FEL and execution phases of a project are one such constraint and an opportunity for improvement.

BENCHMARKING IDENTIFIES TRENDS AND BEST PRACTICES FOR COST ENGINEERING/ PROJECT CONTROL Project system benchmarking is used to identify industry trends and best practices, including those for cost engineering. The benchmarking process compares a companys project system performance with that of its competitors. To support benchmarking, data about actual project practices (inputs) and results (outcomes) are collected. Using the empirical data in an industry database, we perform statistical analysis to identify those inputs that drive the best outcomes. We use an empirical industry database to research cost engineering practices and determine which are best at improving cost and schedule outcomes. Many of our research findings about cost engineering are common sense, but it is too easy for management to reject common sense when other cost reduction options (often counter-productive) look so much more attractive on paper. The practices discussed in this article have been empirically demonstrated to work. Before describing which practices are best, we need to explain the scope of the cost engineering practices studied by IPA and the typical practices used in industry. The practices studied include cost estimating, planning and scheduling, and cost/schedule control; these practices collectively are often referred to as project control, which is a core subset of the cost engineering field. Figure 1 illustrates the
Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003

primary steps in the project control process, as documented by AACE Internationals Total Cost Management Framework [3]. Starting at the top-center of the process map in figure 1, the cost engineer estimates the project cost and establishes the cost budget for the project. The cost engineer uses the planning and scheduling step to translate the projects scope into a logical sequence of work activities. The project activities are then executed while the cost engineer measures and assesses the projects performance against the plan (i.e., cost/schedule control). On the left side of the process map, the cost engineer identifies corrective actions when deviations from the plans occur. Finally, the control cycle loop is closed when the cost engineer updates project plans to address project trends and changes. Through benchmarking, we have identified typical industry project control practices, both good and bad. Typically, engineering and construction contractors perform most day-to-day project control functions during project execution. Owners generally set project control requirements, evaluate contractor estimates and proposals, review contractor progress reports, and negotiate contract changes. If the project scope is well defined at the time of project funds authorization (i.e., during FEL), then an engineering contractor prepares the cost estimate and critical-path schedule to support both authorization and control. However, in many projects, definition is lacking in some way and owners will prepare a conceptual or preliminary estimate and milestone schedule for funds authorization, and an engineering contractor then prepares a detailed estimate and schedule later on (often too late) that will serve as a basis for control. For small projects (i.e., <$5 million), all of the owners project control tasks are typically performed on a part-time basis by a project manager or lead engineer from the plant who has experience managing projects. As projects increase in size, an owner project control specialist, who is often based at a central office, may be assigned to the project. However, many owners have downsized their centralized functions; without some way of sharing resources (and without empirical evidence of their value), plants and smaller business units find it difficult to justify keeping project control specialists in-house.

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Figure 1Project Control is a Process

As owners downsize their project control capabilities, there is a corresponding increase in the use of fixedprice contracting or alliances with contractors to reduce the owners project control responsibilities (and presumably risk). As a result, owners typically have very limited estimating and project control experience and capability in-house. Basic owner responsibilities such as setting contractor requirements for project control are given minimal attention. This shrinkage in owner project control capability has not led to improved capital competitiveness; owners cannot divorce themselves from core project control responsibilities and practices and expect to get improved project outcomes. One of the most important findings of IPAs research is that the outcome of fixed-price projects is improved by good owner project control practices. COST AND SCHEDULE ARE THE OBJECTIVES
(FEL DRIVES, PROJECT CONTROL STEERS)

Cost and schedule are key outcomes that generally determine whether a capital project meets its business objectives. Financial objectives are often expressed by measures such as internal rate of return (IRR). IRR and similar measures are based on the evaluation of the life cycle cost and revenue streams in a way that considers the time value of money. In simplistic terms, IRR can be represented by the following equation: IRR = [(present value of revenues) (present value of costs)] /(value of capital investment). (equation 1)

affect the IRR of a typical commodity project in the CPI. As shown in figure 2, for each 10 percent increase in capital project cost, there is about a two percent decrease in IRR. Controlling capital cost is therefore vital to achieving competitive rates of return. Schedule control is more critical for specialty markets that are sensitive to market windows and higher margins for those who get to market fastest. For commodities, it is not a good practice to try to time price swings or cycles. As we stated earlier, FEL is the key driver of improved project cost. FEL is the

Project cost is a critical driver of IRR; it comprises most of the denominator in the IRR equation. The project schedule affects the IRR equation by determining when the revenue stream begins: the longer the schedule, the more heavily discounted the revenue, and the greater the chance that the market window of opportunity will close. Figure 1 illustrates how changes in project cost and schedule Figure 2Cost Drives IRR for Commodity
Projects

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process by which projects are selected, defined, and prepared for execution (detailed design and construction). FEL is important because all other excellent practices require good FEL to be practicable and effective. To rate the quality of FEL, we use a numeric scale to evaluate the completeness and quality of front-end work in alignment and clarity in business objectives, site definition, project execution planning, and engineering definition. To make the numeric scale more intuitive, we group the scale into five categories ranging from best to screening. Figure 3 illustrates the FEL categories and shows how FEL drives project cost outcomes. Figure 4 illustrates that the average quality of project definition has improved-from the low end of the fair category to the good categorysince 1990. Although FEL is a powerful driver of cost outcomes, benchmarking has shown that not all outcomes have been improving with FEL. One disappointment has been the lack of improvement in the reliability of cost estimates. Figure 5 shows that estimate reliability has remained the same since 1994, with a standard deviation of plus or minus 12 percent (i.e., approximately 66 percent of project authorization estimates have reliability or accuracy within that range). Industry estimates typically quote an accuracy range that covers closer to two standard deviations (i.e., about 95 percent of observations). Using that criterion, the IPA statistics indicate that industry authorization estimates are accurate only to about plus or minus 20 percentnot the five or 10 percent range that many consider typical. Variability in actual versus estimated cost is a cause of concern because overestimates may lead to excess capital being committed to a project (our data show that excess capital tends to be spent), underestimates may lead to the wrong project being selected because of overstated IRR, or underestimates may contribute to poor cost control because they result in unrealistic plans, such that the project is not sure what its true status is. The failure of project systems to produce more reliable estimates is largely caused by a lack of improvement in industry project control practices (i.e., a lack of improvement of estimate quality during FEL, a lack of improvement in

discipline and control during execution, or both). Status quo project control practices are not working well.

BEST PRACTICES FOR COST ENGINEERING/ PROJECT CONTROL Our research has identified a set of owner project control practices that correlate with improved cost outcomes. In

Figure 3FEL Drives Down Project Cost

Figure 4FEL Has Been Improving

Figure 5Estimate Reliability (Accuracy) Has Been Stagnant

Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003 27

this section we describe these practices and explain the degree to which they can improve your project results. The list does not represent a complete project control process or system by any means. For example, we assume that every project team will plan and control cost and schedule using a process similar to figure 1. The practices described below are those practices that reflect real owner commitment to project control. Have an In-House Cost Estimator Have an in-house cost estimator (or person with equivalent skills and knowledge) quantitatively validate the project cost estimate prior to authorization. IPA has found that whether the owner or contractor prepares the authorization estimate does not matter as long as the estimate is validated quantitatively by an owner cost specialist. While project managers can sometimes be good cost estimators, most become overextended trying to do all project control tasks themselves. The most common means of quantitative validation include a comparison with actual absolute cost of past projects, comparison with absolute cost of check estimates (e.g., the owner estimate), or comparison with relative cost metrics or ratios [1]. The purpose of quantitative validation is not to repeat history, but to identify exceptions from the norm. You must be able to explain the exceptions. If the estimate is more aggressive (i.e., better productivity or lower cost) than past projects, specific project practices that will support the improved outcomes must be either in place or plannedwishful thinking is not enough. Ensure that the Estimators Independent of the Project are

Figure 6Less Contingency is Used With Good Project Control

Independent means free of undue bias. The estimator can work for the owner or the engineering contractor, but the estimators personnel performance evaluation must not be too heavily influenced by the project or business manager responsible for the project or asset. Managers can be biased toward their favorite projects, or they can have a predetermined cost in mind. Project costs are often underestimated because the estimator was subject to subtle (or not so subtle) coercion. Other projects are

overestimated because project team construction crews too early; the crews members are punished for even minor cost hang around waiting for drawings or materials that have been promised but not overruns. delivered. Use Physical Progressing to Measure Assign an Owner Project Control Work Progress for all Cost Categories Unfortunately, too many project Specialist to the Project During estimates are prepared with the primary or Execution Project managers have plenty to sole objective of obtaining the number for authorization with little regard for the handle in leading the project without estimates purpose and structure to support performing all the tasks of project control. that purpose. The best practice is to Even if the heroic project manager can develop the authorization estimate as the handle it all, the project is at risk of basis for project control for all cost disruption (particularly schedule slip) if the categories; the bottom-line number is a project manager is pulled off or otherwise byproduct. Even for fixed-price projects, an leaves the project (heros are in great owner estimate designed for control will be demand). The project control specialist the best basis for evaluating contractor does not need to be assigned full time; in fact, it is common for one project control proposals. The estimate structure needs to be specialist to handle multiple small projects able to support physical progressing. (just as the project manager might). During engineering and construction, Owners who have project control many project managers rely on subjective specialists to assign tend to have a project measures of progress and then fall prey to control process and an overall stronger over-optimism. Even worse are project project system. managers who use the percentage of Report Project Status and Progress budget hours or dollars consumed as an Frequently and in Detail This practice is likely a proxy measure indication of progress. One all too common scenario of poor progressing is for project control process discipline. To the project manager who thinks the project produce frequent, detailed reports, all is 95 percent complete and discovers while pieces of effective control will likely be in developing the punchlist that only 75 place: strong FEL and project planning, a percent of the work has been completed. well-structured definitive estimate, physical The project managers immediate reaction progressing for all cost categories, and an is to pile more people on the job to assigned project control specialist. A accelerate the progress, but the crowding contractor can prepare the report, but the then causes a complete breakdown of owner must at least establish the reporting discipline and control. Another scenario is requirements and then evaluate and react the project manager who ramps up appropriately to the report contents.

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Collect Actual Cost Information and Use it to Plan and Validate the Estimate The historical cost database is where the owner closes the loop on the project control process [1]. To quantitatively validate an estimate, the cost specialist must have something against which the estimate can be compared. A historical database provides absolute comparison project data (estimated and actual), cost metrics, and ratios. External benchmarks should be obtained as well. Another benefit of developing an historical database is that the practice of asking for detailed cost proposals and detailed final closeout data shows the contractor that the owner understands project costs and is not likely to be fooled. In fact, our research shows Figure 7Aggressive Projects With Strong Project Control Achieve the Best Results that owners who quantitatively validates estimates and collects detailed cost data for aggressively scheduled projects to 0 benefit the most from project control percent, but project control does little to because small projects tend to have huge does obtain better fixed-price proposals. reduce contingency usage for percentage cost variations. As might be expected, large projects tend to use better conservatively scheduled projects because PUTTING THE PRACTICES project control practices, but still only 28 conservatively planned projects have little TOGETHER trouble avoiding growth; these projects percent of large projects use good project IPA has developed a numeric scale tend to be loaded with fat to cover control practices. Please note that the practices listed do with which to rate project control practices ineffective practices. In other words, not proscribe specific estimating and project control cannot make an ineffective on a project. To make the numeric scale control tools, detail procedures, and project effective. It can only preserve the more intuitive, we group the scale into four minutia of how the practices are done dayvalue that is built into a plan during FEL. categories ranging from good to to-day. For example, we have found some In summary, lets review the practices deficient. Figure 6 shows how cost owners who achieve good results using that successful owner project systems use to growth can be reduced by 20 percent using estimating tools developed in-house, while be competitive. To ensure project success, the best project control practices (the others are equally successful using the project team defines the project well figure shows the percentage of contingency commercial estimating software packages. during the FEL phase of the project. The used on a $5 to 10 million project with plans that the team develops during FEL good FEL; the percentage reduction is RESURRECTING THE OWNER greater for smaller projects). Strong project are aggressive (they know that the estimate PROJECT CONTROL FUNCTION is aggressive because the owners cost control practices reduce contingency use experts have quantitatively validated it) and for both reimbursable and fixed-price If your company has been deficient contracts. Fixed-price is a misnomer the estimator structures the cost estimate at in project control practices, start now on authorization to support physical because the price is fixed only if there are building (or rebuilding) your in-house progressing of all cost categories. During no changes; strong FEL and project functional knowledge and capabilities. As the execution phase of the project, the control both reduce the amount of change. team measures their progress using discussed, most day-to-day project control physical progressing techniques with close activity is the responsibility of project STRATEGY FOR SUCCESS oversight from an assigned owner project contractors, but some tasks should not be DURING EXECUTION: PLAN AGGRESSIVELY, THEN CONTROL control specialist. The team reports their outsourced. Your company needs in-house progress frequently in detail, and finally, personnel to quantitatively validate cost Will best FEL, backed by good project they capture their actual project results in a estimates and bids based on cogent, up-tocontrol practices, result in the most database that they will use for future date knowledge of what asset and project costs should be. In-house project control competitive project cost outcomes? Not planning. As we said, this set of practices is expertise is needed for establishing project necessarily. Project managers who start with conservative (i.e., fat) plans at common sense, but these practices are not control procedures and requirements for authorization and then control against that used on many projects. IPA has found that contracts. During project execution, inconservative base will succeed only in 70 percent of small projects (i.e., < $5 house cost and project control expertise achieving the noncompetitive outcome million) had poor or deficient project supports the project managers efforts to that they planned for. Figure 7 shows how control practices. This is unfortunate effectively spot and respond to project project control reduces contingency usage because small projects, in relative terms, trends, address potential changes, negotiate

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change orders, and otherwise control the project. uilding an in-house cost engineering/project control capability takes time and patience. Estimate at least three years to get up the learning curve. In year one, core people are identified and put in place, a project control process is established as part of your project system (along with plans to roll the process out and obtain buy-in from everyone in your companys project community), and basic tools acquired or built (e.g., software and databases). In year two, practices are piloted on selected projects and early learnings are fed back to improve the process, tools, and training. Benchmarking with peers in your industry and profession will help with the improvement process. In year three, some early successes should be noted that will help to overcome resistance from project teams and others. Your company is on its way to more competitive capital projects! x

REFERENCES 1. Hollmann, John K. Project HistoryClosing the Loop. 1995 AACE International Transactions. Morgantown, WV: AACE International, 1995. Hollmann, John K., and Edward W. Merrow. Controlling Project Costs. Chemical Engineering (November 2001). Hollmann, John K., and Wesley R. Querns. The Total Cost Management (TCM) Framework. Cost Engineering (March 2001). Merrow, Edward W., and M.E. Yarrosi. Managing Capital Projects. Chemical Engineering (October 1994).

2.

3.

4.

engineering experience in the minimg, manufacturing, process and nuclear industries, including 13 years of project control and cost engineering. At IPA, he manages the research and metrics programs of IPAs Industry Benchmarking Conference Cose Engineering Committee (CEC). He has been a technical director of Recommended Practices for AACE International. He is a Registered Professional Engineer (Pennsylvania) and a Certified Cost Engineer (CCE). He holds a BS in minng engineering from Pennsylvania State University and an MBA from the Indiana University of Pennsylvania. He has published a number of professional papers and was a contributing author to the Engineers Cost Handbook.
Technical Articles - Each month, Cost Engineering journal publishes one or more peerreviewed technical articles. These articles go through a blind peer review evaluation prior to publication. Experts in the subject area judge the technical accuracy of the articles. They advise the authors on the strengths and weaknesses of their submissions and what changes can be made to improve the article.

Editors note: This technical article is reprinted from the 2002 AACE International Transactions. ABOUT THE AUTHOR John K. Hollmann, PE CCE, is a research analyst at IPA (phone 703-810-1296, Fax: 703-709-0838, e-mail: jhollmann@ipaglobal.com). He 26 years of

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Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003

E Not Editors ditors Note

Marvin Gelhausen, Editor

Corrections to The Necessity of Project Scheduling Updating, Monitoring, Statusing

Editors Note: The following five figures are corrections for the first five of 11 figures that were part of the July issue Certification Paper, The Necessity of Project Schedule Updating, Monitoring, Statusing, by Jeffrey D. Kursave, CCC. The original master electronic file became corrupted and we had to quickly redo the July issue. One of the problems missed was that in this article, figures 1-2 were a reflow of figure 6. Figures 3-5 were reflows of figures 7-9. A corrected electronic version has been posted at our website, www.aacei.org, and we are reprinting below the first five graphs as they should have been shown.

Figure 1Original Project Schedule (PRJX)

Figure 2Updated Schedule on 12/31/01 (PRJ1)

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Figure 3Updated Schedule on 02/25/02 (PRJ2)

Figure 4Updated Schedule on 04/22/02 (PRJ3)

Figure 5Updated Schedule on 06/10/02 (PRJ4)

32 Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003

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T he AACE I T he AACE International Bulletin

Chinook-Calgary Section The Chinook-Calgary Section had another great year of membership growth with 40 new members and 20 percent growth. This trend has been continuing since 1998 when the oil and gas sector heated up in Calgary. The section also celebrated five members attaining 25 years of AACE International membership. They were around when the section was chartered. Congratulations to Art Kowalchuk, Robert McCarthy, Robert Young, Paul Rutter, and Gunther Doering. The ChinookCalgary Section also received its 12th consecutive Outstanding Section Award at the Orlando Annual Meeting. Many thanks to the Board of Directors for their strong support in running one of the strongest sections in AACE International. Our success is because of the volunteers that work hard at monthly meetings, workshops, seminars, and in teaching. Connecticut (Nutmeg) Section The Connecticut Section has conducted two planning meetings this summer to finalize meeting locations, speakers and section officers. Their first section meeting will be on Tuesday, Sept. 9. Delaware Valley Section In July, the Delaware Valley Section conducted a planning meeting for the upcoming 2003-2004 year. The members prepared a tentative schedule of meeting dates, locations, joint meetings, as well as section direction and progression. Genesee Valley Section The Genesee Valley Section has been busy since the Orlando Annual Meeting preparing for our 2003-2004 technical programs. The Section has had several lunch meetings designed to transition information from last year's officers to this year's Board of Directors. Additionally, the Section's nine officers have been busy planning a full schedule of 10 technical meetings for the year, beginning with a September breakfast meeting at the Rochester Airport Marriott. At this meeting, the Section will be presenting local section members with the sections second consecutive Outstanding Section Award that was awarded at the Orlando Annual Meeting Awards Luncheon. The Section also plans to honor local section member, Bruce Elliott from Eastman Kodak Company, who was awarded the AACE International Charles V. Keane Distinguished Service Award. This is an endowment award presented by the association to a member of an AACE International section who has consistently endeavored to enhance the professional image of cost engineering over an extended period of time. Moscow Section On June 18, the Moscow section had its last meeting for the summer. Members discussed financial management and integration benefits of cost engineering. The Section will be creating a series of articles within the section on the calculation of basic indices using cost engineering methodology.

photo by Rodolfo Morales, CCE

Sitting by the open doorway is Proctor Mike Pritchett, CCE, is shown sitting by the open doorway during the recent certification examination hosted by the Atlanta Section.

Atlanta Section During the summer break from regular membership meetings, the Atlanta Section keeps busy planning for the 20032004 program year and hosting a certification test site. Atlanta Section Certification Director, Bob Hannan CCE, and proctors Mike Pritchett CCE and Rodolfo Morales CCE, conducted the second quarter 2003 Certification Examination for five candidates at the offices of Hanscomb, Faithful & Gould. Also, The Atlanta Section website (www.aaceiatlanta.org) has been revised and the new meeting location, with driving directions, of Alto's Italian Restaurant has been added to the website. Chicago Midwest Section The Chicago Midwest Section sponsored a roundtable conference to discuss the highlights of the Orlando Annual Meeting. John Foushi and Larry Zabrowski moderated the roundtable discussion.

Submitted photo

25 year milestone members from Chinook-Calgary Section include, shown above from the left: Art Kowalchuk, Robert Young, and Paul Rutter. Robert McCarthy and Gunther Doering are also 25-year members but were not in attendance for the photo.

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New England-Boston Section The New England-Boston Section had its summer board meeting via email. Members discussed the upcoming September, October, and November section meetings, as well as speakers and locations of future meetings. The section has also updated its website to include published certification papers, and job listings. Southern California Section The Southern California Section was proud to offer a workshop on six consecutive Saturdays beginning July 19. The primary goal for this workshop was to prepare potential candidates to earn internationally recognized certification. It also provided an opportunity for project controls professionals to improve their skills and knowledge through study and sharing with their peers. The workshop was open to anyone who has a genuine interest in improving his/her knowledge and skills in project controls. The content of the course followed the Certification Study Guide and Skills & Knowledge published by AACE International. The workshop began on July 19 and met for three hours each Saturday from 9 a.m. to noon, concluding on Aug. 23. A certification exam for ICC, CCC, and CCE candidates will be offered on a date that will be voted upon by the workshop attendees. The Southern California Section of AACE International was proud to offer this opportunity to all interested individuals. St. Louis Section The St. Louis Section Board had two summer planning meetings. On June 9, the board brainstormed for meetings, topics, and speakers for the 2003-04 program year. The board spent the rest of June and most of July contacting the speakers, arranging the meetings, and printing the annual brochure of meetings. The section was also well represented at the AACE Annual Meetings in Orlando with 10 members attending. On Aug. 1, was the second board planning meeting to discuss: the mail-out of the annual brochure (and submittal to AACE International headquarters); the education/scholarship committee and lead person for next year; a new Certification Study Group for the fall; updates and revisions to our Section

website; plans for our first meeting of the year in September; how to increase our Section Award points; our financial report; speaker gifts for next year; and some other business. We expect a very good year! x
The viewpoints expressed in column published in Cost Engineering journal are solely those of the authors and do not represent an official position of AACE International, nor is AACE International endorsing or supporting the authors work. The columns are presented solely for review and informational purposes by our readers, who are encouraged to respond.

Each Section of AACE International is encouraged each month to send bulletin items, photos of program presentations, section activities, and tours. Please also send news of individual section members who have excelled at work or have been honored or recognized for special accomplishments. How to submit to the Cost Engineering journal: All submissions should be e-mailed to the Administrator of Membership and Section Services, MaChal Stacher at mstacher@aacei.org. Information may be included in the body of the e-mail or as an attachment. Microsoft Word files are the preferred format. All photos should be sent as PC tiff or jpg files at 300 dpi. If submitting at only 72 dpi, please send the photo as large as possible as conversion will reduce its size. Include the names and titles of each person shown in any photos. Note on Section identification in submissions: In the write ups submitted to AACE International for the Bulletin section of Cost Engineering journal, as well as in Section newsletters and website articles, many times AACE International Sections are referred to as chapters. The correct reference should always be to a Section. AACE International does not have chapters. Please do not refer to Sections as chapters. Note on the listing of dates: If an event is during the month of publication, it will be listed as an upcoming event even if members will not receive their journal in the mail until after the listed event. The journal goes to press about a month in advance of delivery, the issue date is always the first of each month, and the electronic version should be posted by that date. AACE International reserves the right to edit all submissions and to refuse to publish any submissions determined by the editor or executive director to not meet the standards of the journal. Anyone with questions on submitting copy or photos may contact Managing Editor Marvin Gelhausen at mgelhausen@aacei.org, Graphic Designer/Editor Noah Kinderknecht at nkinderknecht@aacei.org, or the Administrator of membership and Section Services, MaChal Stacher at mstacher@aacei.org

Submitted photo

Ten members of the St. Louis Section attended the 47th Annual Meeting of AACE International at Orlando, June 22-25.
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Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003

James M. Neil Memorial Donation

Upon learning of the passing of Dr. James M. Neil, PE, one AACE International member made a generous donation to the AACE International Endowment Fund to establish the James M. Neil Memorial. Those members who knew Jim personally, or appreciated his service to the profession and to AACE International may wish to honor him by contributing to this memorial fund. You may do so in one of three ways: Visit our website, www.aacei.org, click on "Education," click on "Donate to the Education Funds," enter your credit card information and in the comments section note that your contribution is in memory of James M. Neil. Mail a donation to "AACE International Endowment Fund," 209 Prairie Avenue, Suite 100, Morgantown, WV 26501. Call the AACE Headquarters office at 1-800-858COST or 1-304-296-8444 and give your credit card information to a staff member.

AACE INTERNATIONAL SECTIONS ONLINE

Alabama
http://ecob.org/aace.htm Atlanta

National Capital

http://www.AACE-NCS.com New Jersey Section

http://www.aaceiatlanta.org Cascade

http://www.lvforum.com/aace-nj North Florida

http://www.aacecascade.org Catawba Valley

http://nflaace.com/ Norway

http://www.coste.org/aacev communities.msn.no/AACENorway+navenCentral Savannah River Area tryid=100

http://www.aacei-csra.org Chicago-Midwest

Oklahoma

http://www.chicago.aacei.org Chinook-Calgary

home.flash.net/~rkboles Rattlesnake Mountain

http://www.aace-chinook-calgary.org CyberSection

http://www.webbworks.com/aace Rocky Mountain

clubs.yahoo.com/clubs/aaceicybersection.htm

http://www.aacerms.com San Francisco Bay Area

Dallas-Fort Worth

http://www.aacei-dfw.org East Tennessee

http://www.aacesf.com Southern California

http://www.aace-ets.org/ Genesee Valley

members.tripod.com/aace-scs/ Southwestern Ohio

http://www.aacei-gv.org http://communitylink.activedayton.com/grou Houston-Gulf Coast ps/aaceiswohio

Jim Neil was a highly regarded author and educator. You can honor his memory by making a contribution that will be used to help design and produce state-of-theart educational tools, such as the latest textbooks and online learning courses.

http://www.aacei-houston.org Idaho Snake River

St. Louis

http://www.aace-snakeriver.org Kuwait

http://web.networkusa.net/aacestl Tennessee Valley

http://go.to/aacekwt Montreal

http://www.tennvalaace.com University of Tennessee

http://www.aaceimontreal.org

http://www. engr.utk.edu/~aace/

Invest in the Future of the Profession

Contribute to the AACE International Education Funds
Scholarship Fund: The Scholarship Fund makes awards every year to deserving students who are pursuing an education in cost engineering or cost management. In the past forty years, AACE International has awarded more than $800,000 through scholarships, funded entirely by contributions of our members and sections. You can do your part to help train the cost professionals of the future by making a donation of $30, $40, $50 or more to the AACE International Scholarship Fund. Just indicate the amount of your donation to the Scholarship Fund when you remit your dues. Endowment Fund: Your donation to the AACE International Education Endowment fund will be added to the donations of other members and sections and used to support development of distance learning tools (CDs, self-paced internet courses, etc.). The Education Board is actively engaged in designing courses that will be available to anyone, anywhere in the world, who wants to improve his or her skills. If you want to participate in providing state-of-the-art distance learning products to individuals who want training without travel, specify a donation to the Endowment Fund when you pay your dues.

If you are interested in making a contribution contact AACE International at 800-858-COST or 304-296-8444

Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003

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TThe Silver F he Silver Fox Report

John A. Foushi, ECCE, Silver Fox Committee Chair

Highlights from Orlando, Florida

he Silver Fox Committee conducted its annual meeting on June 24, in Orlando, FL. This was during the AACE International Annual Meeting. There were 11 in attendance, representing 11 sections and various chairs and officers. All senior members of AACE International who wish to stay active in the Association are encouraged to join the Silver Fox Committee. The application for committee membership can be found at the website (www.info@aacei.org) or call Headquarters for a copy. The Silver Fox Meeting focused upon extensive discussions on the health and welfare of the Association and how we can help the membership, local sections, and headquarters. Barry G. McMillan, Executive Director, discussed the status of Emeritus and Honorary Life Members. Emeritus membership may be granted, subject to approval by the Vice PresidentAdministration, to members who have retired from active business or have become incapacitated, provided that they shall have been active members in good standing for at least 10 years prior to their application for Emeritus Membership. Emeritus and Honorary Life members shall not be subject to dues or assessments and shall enjoy all the privileges of members. There are several outreach opportunities available including the mentoring programs with the Technical, Education, and Certification Committees. The AACE International Transactions for this meeting are in CD format with no hard copies printed. This resulted in a large cost avoidance for the Association, both in publishing and shipping cost. The Membership Directory and Resource Guide to be mailed this fall to the membership will also be in CD format, resulting in similar savings. Delinquent members continue to be a problem. Help from the local sections in the form of personal contacts is the greatest device in member retention. Overall, member attrition is down because of several strategic plans that are already in place to seek membership growth and retention. Mr. McMillan said that S/F Committee members should prepare articles for the Cost Engineering journal. These articles should offer variety, broad scope, ethics, etc., for the readership of our members. With the vast experience of the S/F membership, there should be no shortage of subject matter. There is a need for the basic Skills & Knowledge publication to be updated and expanded for the upper classmen/graduate courses. It is currently aimed at the undergraduate level. Also, S/F members should volunteer to approach various corporate management in their communities regarding the benefits of the Corporate Sponsorship Program. Management must be convinced that this program provides a unique

opportunity to support their team's professional development though continuing education, certification programs, networking, annual meetings and discounts on leading industry publications. Mark T. Chen, Chairman of the Education Board, was unable to attend this meeting and no formal report was presented. However, Mr. Chen did submit items to be included with the meeting minutes, including the following information: Thirteen of the 23 chapters that will make up the Skills & Knowledge 5th edition have received two to four peer reviews. Several targeted reviewers have been selected to enhance the creditability of S&K 5. Three more S&K 5 chapters were recently sent out for peer review. The target is to complete S&K 5 for publication in December 2003. The format for the 2003 Annual Meeting was changed to allow only five topics with two to three hours per session to facilitate instruction and hands-on workshop experience. A complementary calculator was presented to attendees to aid in participation at the workshop exercises. 16 students registered for the distance learning courses via AACE International website bookstore. A special session was conducted June 24th with academic and research representatives attending the Annual Meeting to solicit ideas to enhance university relationships. The Ed Board did an internal analysis to identify contributing factors of low seminar attendance. We are revisiting topics and instructors for the 2004 Annual Meeting Seminars. Dr. Parviz Rad will represent the Ed Board on the Specialty Certification Task Force until the "Planning & Scheduling" Specialty Certification Program is implemented in June, 2004. The next Ed Board meeting is Sept. 26-27, in Morgantown, WV.

The top scholarship winner, Stephanie Siakel, a senior at Kettering University in Flint, MI., was present at the Annual Meeting and recognized at the Award Luncheon. She is majoring in industrial engineering A donation of $500 was made to her travel budget. Steven Boeschoten, ICEC Chairman, presented an overview of the International Cost Engineering Council, its founding associations, member associations, and future meetings. The organization has grown to 43 countries with six others applying for membership. The Dutch Association of Cost Engineers has adopted AACE Internationals Education Boards Skills and Knowledge as its standard study publication. Also, there is a joint agreement regarding certification whereby CCC/CCE's designations will be used by DACE. The AACE International

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Certification programs are accredited by ICEC and by the Council of Engineering and Scientific Specialty Boards (CESB). Standards adopted by the ICEC member associations have been summarized on the ICEC website. A PowerPoint presentation about ICEC maybe downloaded from the website. Current information regarding the activities of AACE International is available from the Association website at (http://www.info@aacei.org) and also on the ICEC website at (http://www.icec.org). Recent additions to the ICEC website include a calendar of events, labor rates, steel pricing data, and the ICEC electronic journal, International Roundup. Larry R. Dysert, CCC, Chairman of the Technical Board, and Nicholas Keller, CCE, Chairman of the Certification Board were unable to attend the S/F meeting. No formal reports were presented. Please refer to the AACE International Annual Report for information on the accomplishments of these two boards. The report is available at the association website, www.aacei.org. There is a constant need for questions for the Certification Examination. We continue to receive an excellent response to the Association website where a variety of information is always available. Mentoring by the Silver Fox members is available to those who are in need of additional technical information. Robert Templeton, of the Silver Fox Financial Committee, reported that the balance through May 31, 2003, was $14,438.29 which includes $7,060.00 of GE Stock. Tax- deductible contributions were received from 20 Silver Foxes, and the committee membership is currently 113 members. Cass DeCwikeil was appointed secretary and took the minutes of the annual S/F Committee meeting. The S/F Committee is keeping expenditures down by a donation of clerical efforts, postage, photo copying, and supplies. The majority of the correspondence is being done with e-mail. Possible future investment and ideas for uses of the committee funds should be forwarded to John Foushi and Robert Templeton. Prior to the Annual Meeting, the Chairman mailed letters to nine surviving spouses of deceased members of the Associations. Replies were received and the surviving spouses were very grateful for being remembered. None of them wished to attend this Annual Meeting, but wished to be remembered for the next meeting. I would like to thank everyone who attended the Silver Fox Committee meeting in Orlando, and also those who participated in our work throughout the year. My eleventh year as Chair has been a learning lesson and I will continue my efforts to keep everyone informed. The committee's main focus is on encouraging senior members to stay active, especially at the section level and to promote the AACE International's Scholarship and Certification Programs.x
The viewpoints expressed in columns published in Cost Engineering journal are solely those of the authors and do not represent an official position of AACE International, nor is AACE International endorsing or

New Distance Learning Course Available through AACE International

ESTIMATING AND BIDDING begins Sept 15, 2003
A 10 week online class teaching you how to:
- Estimate the cost of general conditions - Prepare quantity take off of excavation and backfill - Prepare quantity take off of concrete, and formwork. - Use unit prices to price your estimate - Prepare quantity take off and conceptual estimate of masonry work

Students choose their own class hours but must complete a certain amount of work each week.
To do well in this course you should already have the following skills.
- Know how to read blueprints - Know how to use a spread sheet software such as Microsoft Excel, Lotus 123, or Quattro Pro - Have a basic knowledge of construction estimating subjects including: - Basic math skills - Estimating terminology (quantity take off, unit price, production rate, etc.) - Use of the calculator and architectural scale - Be able to organize your work so it can be easily understood by others

Check out full details of this course on the AACE website, www.aacei.org/distancelearning, or contact Charla Miller at cmiller@aacei.org.

Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003

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A Rep Annual nnual Report Supplement

Editors note: The following report on AACE Internationals Special Interest Groups (SIGs) was inadvertently omitted from the Annual Report included with the July issue of Cost Engineering journal. AACE International members are encouraged to participate in any of these SIGs. For more information, visit www.aacei.org/trchnical.

SPECIAL INTEREST GROUPS

F. Sam Griggs Jr., CCEDirector
Aerospace SIG Sarwar A. Samad, CCE - Chair E-mail: AerospaceSIGChair@aacei.org List E-mail: AerospaceSIG@aacei.org This SIG's charge is to develop, collect, analyze, and share data and cost engineering techniques specific to the aerospace industry. Appraisals SIG Join List: AppraisalsSIG Carl C. Chrappa - Chair E-mail: AppraisalsSIGChair@aacei.org List E-mail: AppraisalsSIG@aacei.org This SIG represents the valuations and appraisal industry by compiling relevant standards from the Appraisal Foundation, through presentations to various industry groups on recommended practices, and through presentations of technical papers at various trade associations and professional societies, local sections, and annual meetings. Claims & Dispute Resolution SIG Join List: CDRSIG Donald F. McDonald, Jr. PE CCE - Chair E-mail: CDRSIGChair@aacei.org List E-mail: CDRSIG@aacei.org Many of AACE International's members are actively involved in the making or reviewing of claims on projects. Involvement ranges from preparation to analysis and resolution of claims. Currently, no professional society exists that serves the needs of professionals involved in claims management. This SIG has been formed to fill this need. The purpose of the SIG is to provide a neutral, professional forum where professionals actively involved in the management, mitigation, and resolution of claims can meet and discuss issues of common interest. This SIG will attempt to sponsor a full track of claims-related papers at every Annual Meeting as well as soliciting claims-related papers for Cost Engineering and participating in various Chapter and Regional AACE meetings. Construction SIG Join List: ConstructionSIG Douglas D. Gransberg, PE CCE - Chair E-mail: ConstructionSIGChair@aacei.org List E-mail: ConstructionSIG@aacei.org This SIG is responsible for the collection, development, and dissemination of recommended practices and standards for general construction projects. This is accomplished primarily through the presentation of technical papers at local sections and annual meetings, in addition to submission of articles to Cost Engineering. The SIG initiates and analyzes results of industry surveys. This SIG also continues a liaison relationship with the Construction Industry Institute. Environmental SIG Join List: EnvironmentalSIG Richard A. Selg, CCE - Chair E-mail: EnvironmentalSIGChair@aacei.org List E-mail: EnvironmentalSIG@aacei.org This SIG pursues and develops innovative cost management guidance for resolution and compliance to environmental issues. The Environmental SIG continues to support activities for the Department of Energy's Applied Cost Engineering (ACE) Team that is developing project/program management improvements for DOE's environmental management. This SIG also supports the Corps of Engineers and other federal agencies. Forest Products SIG Join List: FPSIG (Chair Open) E-mail: FPSIGChair@aacei.org List E-mail: FPSIG@aacei.org This SIG promotes communication between the forest products industry and AACE International. The objective is to develop standards for the engineering, procurement, and construction of facilities. These standards include process mill area definitions and standards for budgeting, accounting, cash flow, and property records. Government & Public Works SIG Join List: GPWSIG Joseph L. Macaluso - Chair E-mail: GPWSIGChair@aacei.org List E-mail: GPWSIG@aacei.org This SIG focuses on compiling and reporting data relative to construction projects for the US federal, state, and local governments, which includes coordinating activities with the Departments of Defense, Energy, and Transportation.

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High Tech SIG Join List: HTSIG Peter Luke - Chair E-mail: HTSIGChair@aacei.org List E-mail: HTSIG@aacei.org Information Technology SIG Join List: ITSIG Robert E. Cribb - Chair E-mail: ITSIGChair@aacei.org List E-mail: ITSIG@aacei.org This SIG represents the growing concerns around the IT industry and the impact that is being made through Project Management guidelines in managing large scale infrastructure and architectural projects. Review of best practices regarding estimation, scheduling, and management of labor intensive efforts are analyzed in order to establish best practices. Presentations at various trade associations and annual meetings are encouraged. Interdependencies between various engineering groups such as Telecommunication, wireless engineering, inter/intranet development, computer engineering, and protocol evolution are explored. International Projects SIG Join List: IPSIG John G. McConville, CCC - Chair E-mail: IPSIGChair@aacei.org List E-mail: IPSIG@aacei.org This SIG gathers and communicates methods, procedures, and related data used to translate all project cost elements of a defined construction project scope of work from one geographic location to another. The SIG hopes to identify, share, and promote those practices and understandings that are common among location factor users and developers. It is an international industry-wide forum for collecting, promoting, and standardizing (where appropriate) areas of location factor development and knowledge that will serve as a basis for continuous improvement. Manufacturing SIG Join List: ManufacturingSIG Alfred Deckys - Chair E-mail: ManufacturingSIGChair@aacei.org List E-mail: ManufacturingSIG@aacei.org This SIG is responsible for addressing the unique needs of the manufacturing environment. Work on standardization of manufacturing cost definitions and sponsoring technical papers at local sections and annual meetings are some of its activities.

Oil/Gas/Chemicals SIG Join List: OGCSIG Michael L. McGraw - Chair E-mail: OGCSIGChair@aacei.org List E-mail: OGCSIG@aacei.org This SIG focuses on all cost engineering and total cost management principles pertaining to the oil, gas, and chemical process industries. Key subject areas include chemical process economics, sensitivity and risk analysis, capital and operating cost estimating, project management, cost control, and economic screening evaluations of research and development projects. The SIG's goals are to facilitate communication between AACE members working in the oil/gas/chemicals industries and promote the interchange of information resources, evaluation and estimating tools, and methodologies used within the industries. Transportation SIG Join List: TransportationSIG Robert H. Harbuck, PE CCE - Chair E-mail: TransportationSIGChair@aacei.org List E-mail: TransportationSIG@aacei.org The SIG focuses on all cost engineering activities that are applied in the transportation industry. The transportation industry includes transit, both rail and bus, highways, airports and railroads. AACE International's members represent a wide variety of the professions active in transportation and include owner agencies, government agencies, consulting, and engineering and management firms. The goal of this SIG is to provide a forum for the exchange of information, challenges and successes that serve to advance the best practice of cost engineering principles by all members working in the industry. Utilities & Energy SIG Join List: UESIG Paul W. Smith, CCC - Chair E-mail: UESIGChair@aacei.org List E-mail: UESIG@aacei.org This SIG establishes professional relationships with the American Power Conference, the Electric Utility Cost Group, and the Electric Power Research Institute, among others. It prepares utilities and energy-related papers for annual meetings and for other publications. It reviews technical papers, provides technical input, and provides other technical support for the Association. The SIG acts as the interface between the Association and public utilities. It develops areas for research, responds to industry concerns, and helps promote the growth of the Association in the utilities and energy fields.

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A r ticle

Reprints and Per missions

Cost Engineering Journal, Volume 4/Number 9, September 2003

Pages 13-17 Readers of the Cost Engineering journal can purchase copies of selected articles that are published with an AACE International reference number at the end of the article. Articles can be delivered in print form or in Adobe Acrobat (PDF) format. Please refer to the AACE International reference number when contacting our Publications Sales department. To Order Contact: Nancy Merrifield, Administrator, Publications Sales at nmerrifield@aacei.org Reprint Prices: Quantity Member/Non-Member 1-9 copies $5.00/$7.50 10-49 $4.50/$7.00 50-79 $4.00/$6.50 80-99 $3.50/$6.00 100-499 $3.00/$5.50 To Contact Us AACE International 209 Prairie Avenue, Suite 100 Morgantown, WV 26501 USA Phone: 304.296.8444 Fax: 304.291.5728 For Information On Other Reuse Requests If you are seeking permission to copy, quote, or translate into another language any material from any issue of the Cost Engineering journal, please contact our Managing Editor, Marvin Gelhausen at mgelhausen@aacei.org

Owner Caused Delay Field Overhead Damages

Matthew James Lankenau, CCE This article is written to assist in the quick and efficient calculation of the appropriate compensation due a contractor for an owner-caused increase in the project duration. This article explains the basic calculation of a daily delay rate and relevant factors. The courts have clearly established the requirements to use a total cost claim damage methodology for direct costs. However, field office indirect or field overhead costs are often not treated with the same scrutiny, despite the fact that the same concepts are evident. The total actual indirect cost to date is often used to calculate delay damages, despite inclusion of bid errors or omissions and lack of complete owner causation. The result is that additional project duration is obtained at an inappropriate premium. The owner should be able to obtain additional time at the as-bid rate unless the added scope is materially different than the original contract. This article presumes that the contract does not already establish a daily rate nor makes specific mention of its calculation. This article does not address the allocation of delay responsibility. Reprint 20735 Pages 18-23

dispute, the methodology was used and outlined in the analysis narrative. As outlined in this article, the claimants own schedule delays were identified and quantified easing the defendants concern that concurrent delays were accounted for. In all the cases, the resulting schedule analysis was agreed to and was unconditionally accepted by both parties. This article provides a brief description of what events lead to a dispute and the importance of the schedule analysis to support the claimants damage complaint. The schedule analysis presented in this article is based on creditable schedule analysis technique currently used to analyze schedule delay and is modified to separately analyze claimant schedule delaying events. Reprint 20736 Pages 25-30

Best Owner Practices for Project Control

By John K. Hollmann, PE CCE For the past several decades, owner companies have been reorganizing, reengineering, downsizing, and, at times, eliminating their in-house cost engineering function in a drive to improve cost competitiveness by reducing what company management perceives as overhead. Capital program managers, hoping that these actions would improve cost outcomes, have largely been disappointed. In this article, a better approach than cutting and blind outsourcing is described; an approach that uses the best owner cost engineering practices to ensure competitive outcomes. The approach has been demonstrated to work through quantitative research of empirical industry data. Reprint 20737

Schedule Delay Analysis: Modified Windows Approach

By Kirk D. Gothand, CCC The schedule analysis methodology outlined in this article has been successfully presented by the author on six contract disputes in the past two years involving schedule impacts. In each

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C Calendar alendar of Events

September 2003 7-9 CMAA 2003 National Conference,
Construction Management Association of America (CMAA), Washington DC Contact: www.cmaanet.org Washington, DC Contact: phone (770) 925-9633, fax (770) 381-9865, www.aee.center.org

6 The AACE International Second

Quarter (3Q) 2003 Certification Exam, AACE International.
Contact: AACE International 304-296-8444, www.aacei.org

20-22 23rd Annual Fall Seminar,

East Tennessee Section of AACE International, Knoxville, TN Contact: www.aace-ets.org

9-10 Techniques for Improving the

Building Design Coordination Process, The University of Wisconsin-Madison, Department of Engineering Professional Development, Madison, WI
Contact: 1-800-462-0876, custserve@epd.engr.wisc.edu

February 2004 18-19 A/E/C Systems Annual Tradeshow and Conference, A/E/C Systems- Technology for Design and Construction, Orange County Convention Center, Orlando, FL
Contact: Hanley-Woods Exhibitions phone 972-536-6380, fax 972-536-636, www.aecsystems.com

28-30 13th Annual METALCON

International Conference and Exhibition, PSMJ Resources, Inc., Tampa Convention Center, Tampa, FL
Contact: 800-537-7765 or 617-965-0055, www.metalcon.com

10-13 The National Association of

Women in Construction 48th Annual Convention, The National Association of Women in Construction (NAWIC), Grand America Hotel, Salt Lake City, UT
Contact:phone 800.552.3506, fax 817.877.0324 nawic@nawic.org

November 2003 16-21 2003 ASME International Mechanical Engineering Conference, Research Development and Design Expo, and Defense Research and Engineering Conference and Exposition, American Society of Mechanical Engineers (ASME), Marriott Wardmen Park & Omni Shoreham Hotels, Washington DC
Contact: 1-800-THE ASME (843-2763) infocentral@asme.org

April 2004 17-21 ICEC 4th World Congress 2004, International Cost Engineering Council (ICEC), Cape Town, South Africa
Contact: www.icec.com

18-25 PMI Global Congress 2003,

Project Management Institute, Baltimore, MD Contact:phone 610-356-4600 ext 1098 fax 610.356.4647 http://pmiglobalcongresses.fusion productions.com/NorthAmerica2003

June 2004 13-16 AACE Internationals 48th

Annual Meeting, AACE International, Washington DC
Contact: info@aacei.org www.aacei.org

December 2003 1-2 Congrs Francophone du

Management de Projet 2003, Paris, France
Contact:info@afitep.fr http://www.afitep.fr

30-Oct 1 Designing Structures for Fire,

The Society of Fire Protection Engineers (SFPE), The Structural Engineering Institute (SEI), and the American Society of Civil Engineers (ASCE), Radisson Lord Baltimore Hotel, Baltimore, MD Contact: phone 301-718-2910 www.spfe.org

18-21 18th IPMA World Congress on

Project Management, Budapest, Hungary
Contact:tetspeed@inext.hu http://www.ipmacongress.hu

16-21 Optics and Photonics in Global

Homeland Security, The International Society for Optical Engineering, Renaissance Washington DC Hotel, Washington DC
Contact:phone 1.360.676.3290, fax 1.360.647.1445 www.spie.org/info/hls

October 2003 6-10 Comprehensive Five-day Training

Program for Energy Managers, The Association of Energy Engineers (AEE), Sheraton Premiere Tysons Corner,

AACE International, 209 Prairie Avenue, Suite 100, Morgantown, WV 26501 USA phone: 304-296-8444 fax: 304-291-5728 e-mail: mgelhausen@aacei.org or nkinderknecht@aacei.org website: www.aacei.org
Cost Engineering Vol. 45/No. 9 SEPTEMBER 2003 43

The 2004 AACE International Call for Papers

for the 48th Annual Meeting Washington DC, June 13-16, 2004
A written manuscript in electronic form is To present a paper at AACEs 48th Annual Meeting, an abstract of the proposed required for each paper accepted for the paper must be submitted by Sept. 16, 2003. meeting program. PowerPoint or other slide presentations will not be accepted. You can submit your abstract online or download the needed submission form by A peer review process is offered for those visiting our website, www.aacei.org. who require it to receive credit for their papers. If this is desired, both an abstract and Christian Heller, cheller@aacei.org, and a completed manuscript must be received at the Technical Program Committee will Headquarters on or before Sept. 16, 2003. review the abstracts and select papers for This deadline will not be extended. presentation. Authors will be notified by mail and e-mail whether or not their paper is Once notified of acceptance, authors of selected. non-peer reviewed papers have until Jan. 31, 2004 to submit a completed manuscript, a Full guidelines are available at the AACE signed and notarized publications International website - www.aacei.org agreement, and a concise authors bio.