C ERTIFICATION PAPER

Cost and Schedule Control for Engineering Contracts

Kenneth R. Davey, CCE
ABSTRACT: You have the project requirements and you may have some idea of what the end product should look like, but to transform the requirements and ideas into a form that can be executed requires an engineering design. An engineering firm is hired and the focus shifts to the design activities. The design work takes a little longer than estimated but progress is being made. Eventually the design is completed and construction starts. One day you receive a request for payment to cover difficulties encountered during the design process and additional services performed earlier in the project. Does this sound familiar? Inattention to the engineering contract can result in schedule delays and additional project cost. What is the status of the engineering effort? Has the scope of services been changed inadvertently? Who has the responsibility to flag changes to the engineering contract? Are payments based on the engineering progress? Better upfront work is essential for engineering contract control. This article will cover the cost and schedule requirements and the administrative tools to better manage the engineering portion of the project. Effective cost and schedule control requires a good contractual agreement; an acceptable scheduling system; an engineering resource plan relating personnel, time, and cost; effective progress measurement, cost trending and forecasting systems, and a change management system. Using a disciplined approach to contract management will provide better project control and minimize the "surprises" having a negative impact on your project. KEY WORDS: Contracts, costs, design, forecasting, project management, and schedules

quality front-end planning in preparing the contract requirements is common and often leads to poor contracting arrangements. If both parties have an understanding of the contract requirements and expectations, the results from the design process are greatly improved. An accurate assessment of the design status at all times is essential to contracting success. The key to managing the engineering cost and schedule is documentation through all stages of the contracting process: the project requirements document, the request for proposal, the contract and engineering plan, and contract administration, see Figure 1. The project requirements document, which addresses the owner's objectives and technical performance goals, is outside the scope of this article. Cost and schedule control for engineering contracts begins with the request for proposal. Request for Proposal No matter what phase the project is in when you need to retain the services of an engineering firm, preparing a request for proposal is the first step. The request for proposal needs to itemize all services and deliverables expected from the design firm. If you cannot describe the project and itemize the services and deliverables required, you are not ready to solicit proposals. To proceed without defining the contract requirements results in an iterative design process that wastes time and resources. The technical requirements for design services are outside the scope of this document but the deliverables are covered to the degree that they figure into the cost and schedule development and control. The following are the request for proposal provisions that impact schedule and cost control. General Provisions Project PhasesSpecify the project phase(s) for which engineering services are to be provided: the conceptual phase, design development phase (preliminary

any engineering firms prepare a project proposal describing the services they will provide, a schedule for their activities, and a cost for their services along with other promotional material. It has been the author's experience as an owner's project control engineer that once the engineering contract is signed, there is no schedule or cost control practiced by the engineering firm. Requests for payment are based on the number of hours expended during the time period covered by the request, not on progress. When the engineering firm realizes that the contract balance is insufficient to cover the cost of the remaining work, a request to be reimbursed for "difficulties" encountered during the design phase or for "additional work" performed earlier in the project is submitted to the owner. Attention is diverted from the project to analyze the claim and negotiate a contract modification that does not completely satisfy either the owner or engineering firm. Setting expectations and administering the engineering contract requires as much attention as the project's technical aspects. The ability to have control over the cost and schedule for

engineering work begins with the effort expended in preparing the request for proposal and cost and schedule requirements. Better definition of the services and deliverables expected from the engineering firm results in a greater understanding of the project, a more realistic engineering schedule, and a more accurate cost estimate. This article addresses the cost and schedule related items that should be included in a request for proposal and covered in the contract, examples of documents comprising the engineering plan, methods of determining engineering progress, and managing change to minimize schedule slippage and control cost. Background A successful engineering contract requires thoughtful and thorough preparation by the owner before initiating the contracting process. Failure to follow

Figure 1Major Stages of Contracting

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design phase), construction documents phase (final design phase), construction phase, and close-out. The deliverables and degree of completion for the deliverables are tied to the project phase. For control purposes, it is strongly recommended that each phase be completed, the deliverables be reviewed, and a formal approval be required before any work may begin in the next phase. Project SequenceThe engineering contract may cover one or more phases of the project. Indicate the contract strategy to be used for engineering. Note any predetermined sequencing of events that might affect the engineering schedule reviews, technical approvals, project funding approvals, etc. List the event, when the event will occur, and the event duration. Type of ContractNote the type of contract that will be used for engineering compensation: cost reimbursable, cost reimbursable with guaranteed maximum price, cost plus fee multiplier, or cost plus fixed fee. The level of project definition at the start of design is not suited to a fixedprice contract. A reimbursable contract requires less definition than a fixed-price contract and it is more flexible in dealing with changes as the project develops but it needs to be drawn in a way that allows expenditures to be properly controlled. The owner is at a disadvantage with this type of contract because it is more difficult to predict the final design cost. Poor performance by the engineering firm can result in increased costs. The scope of the design services becomes clearer during the design process. An engineering firm can start work under a reimbursable cost basis. When sufficient design is complete, a more definitive contract can be used. The contract that covers the construction document phase may also include incentives based on overall project performance PersonnelStaffing is an important consideration when using a reimbursable contract. Request that an engineering firm's proposal identify the primary personnel that will be assigned to the project and include a summary of the person's experience. Limit personnel changes during the project. MeetingsList the various types of meetings for each project phase and the frequency at which the meetings will be conducted. A weekly trend meeting is used

for project control and to insure that informational needs of both the owner and engineering firm are being satisfied. Specify what representation from the engineering firm is required at the various meetings. Engineering Services and Technical Deliverables Identify the technical services and documents to be delivered by the engineering firm. The documents and presentations will depend on the project phase and type of project. Referring to a

checklist from the owner's project process or standard documents such as the Scope of Designated Services published by the American Institute of Architects is beneficial in preparing a comprehensive list of services and deliverables. Some typical deliverables are shown in Figure 2. Engineering Schedule The request for proposal should include the requirements that the engineering firm is responsible for preparing and maintaining the engineering schedule. Scheduling

Figure 2Engineering Deliverables by Project Phase

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software is to be used to produce a network diagram in sufficient detail to fully describe the engineering activities, deliverables, and reviews. The layout of the schedule should reflect the project phases, the design process and the execution strategy, if known. The schedule is to show relationships between activities, indicate the critical path, and calculate float. Owner input to the engineering schedule may be required to properly reflect the impact of technical reviews and management approvals. Discipline drawings could be grouped under one or several schedule activities rather than being shown individually on the engineering schedule. When such is the case, a drawing list identifying each drawing for that activity is prepared. If there are a series of work packages to be issued, a milestone on the schedule should indicate when the work package would be released. Once the schedule is approved, a baseline schedule is to be set from which progress can be measured. Updating the status of the engineering work is to be done weekly. Actual start and finish dates for activities are to be recorded. The network diagram is to graphically depict the current status of work. Depending on the project size and complexity, the detailed engineering schedule may or may not be part of

proposal. The time period allotted to prepare the proposal may not be sufficient to prepare a detailed engineering schedule. It is also unrealistic to expect engineering firms to make the additional expenditure in preparing a detailed schedule for larger projects when they may not be awarded the job. At minimum, a summary engineering schedule should be part of the proposal. The detailed engineering schedule can be developed prior to signing the contract.

Engineering Resource Plan The resource plan identifies the engineering and design disciplines and the respective work hours required to accomplish each schedule activity. The engineering firm usually prepares a resource plan to arrive at an estimate for their work, but that resource plan may not be adequate for control. In order to determine progress, the discipline work hours must be integrated with the schedule. Require that a time-based resource plan for each discipline be prepared. For smaller, less complex projects, the resource plan can be submitted as part of the proposal. For larger more complex projects, a summary of the discipline hours estimated to Engineering Estimate The total engineering estimate is complete the work can be submitted with the proposal. The time-based resource composed of the labor cost and the plan would be developed in conjunction reimbursable cost, not to be confused with a reimbursable contract. The labor cost is

with the schedule as part of the engineering plan. For each activity identify which resources are required and how many hours are estimated for the work (Figure 3). The work hours can be are distributed over the activity duration or assigned at incremental milestones. Once the resources and work hours have been assigned to all schedule activities, each resource's work hours per month can be summed to form a discipline resource plan (Figure 4). The discipline resource plan should be reviewed to confirm the work hour allocations and distributions are reasonable. The discipline resource plan will become the basis for determining the engineering progress required in order to stay on schedule. The engineering resource plan is the summation of all the discipline resource plans. Resource planning can be accomplished using schedule software or a computer spreadsheet. Using the software makes resource plan development and maintenance much easier. The software can usually print the resource plan in various formats.

Figure 3Resource Usage by Schedule Activity

Figure 4Discipline Resource Plan

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Figure 5Example of Engineering Estimate

the direct labor (the charge rate times the number of work hours where the charge rate includes a portion of the office overhead cost). Reimbursable costs are expenditures by the engineering firm in the interest of the project and defined in the owner-engineer contract. Such items concern transportation and living expenses for out-of-town travel, long distance communication, the expense of reproducing and handling drawings and specifications for use outside the engineering firm's office, renderings and models, value engineering exercises, and life cycle cost analysis. Request that the project proposal indicates the charge rates to be used for each discipline, the estimated labor cost by discipline and phase, and the reimbursable cost estimate by phase. Labor cost and reimbursable cost are always to be reported separately. Request for Payment Payment provisions should be covered in the contract and only summarized here for the engineering firm's information. Note that payments will be based on progress. Specify the invoice frequency and the invoice format to be used. The minimum information to appear on the invoice is the original contract amount, the total for approved changes, the current contract amount, the total of previous payments, the contract balance, and the amount being invoiced. Overtime is only

to be paid upon prior approval by the should be developed, reviewed, and agreed upon prior to signing the contract. Set the owner. time to review the documents. The schedule and resource plan become the Change Management Change management should be basis from which engineering progress will covered in the contract. An overview of the be measured. Engineering progress will be change management process can be used in determining payment for services rendered. included in the request for proposal. Legal counsel should be consulted in All deviations from the engineering scope, cost, or schedule constitute changes preparing the contract. Cost and schedule that require approval by the owner before requirements from the request for proposal, plan, and contract proceeding. Any change to the engineering engineering contract must be made administration need to be incorporated in through the change management process. the contract directly or through reference. A change order is to identify the cause of While the contract is being finalized, the the change, the scope of the proposed documents comprising the engineering change, the impact on the engineering plan can be completed if not already schedule, and the engineering estimate included in the proposal. (hours and dollars by discipline) to implement the change. The change order Contract Administration Constantly monitor and evaluate is to have all signatures before preceding performance so the status and forecast of the change. Design reviews and design approvals scope, progress, cost, changes, and do not constitute approval of any scope potential claims will always be known. changes that may appear on the drawings. Changes to scope can only be approved Communication Communication between the project through the change management process. team members must remain open to provide an accurate assessment of the Contract and Engineering Plan Any conversations involving It is advisable to hold a pre-award work. meeting with the selected engineering firm decisions, resolution of action items, scope, to confirm that the project requirements schedule, or cost need to be documented and expectations are understood. Any through meeting notes, confirming letters questions or concerns about the proposal or e-mail, memoranda, or telephone log. can be addressed at that time. If not An incorrect statement in a written included in the proposal, the detailed document requires a written response and engineering schedule and resource plan correction.
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Figure 6Action Log Format

Developing and maintaining an effective filing system can be demanding, particularly in an environment where more work is to be performed with less people. Meeting notes, transmittals, letters and emails, faxes, logs, diaries, and reports should be collated and filed for easy access and retrieval. Weekly Trend Meeting Trending is the process of identifying potential risks and vulnerabilities in advance of their occurrence, evaluating and minimizing the impact to the project, and constant surveillance of project conditions to eliminate "surprises." A trending program is essential to detecting changes that could result in claims. The trend meeting, conducted weekly, is not a decision-making meeting. It's a meeting where information is gathered and shared by key technical and service specialists. All current and potential influences are reviewed: status of previous action items, current status of the work, critical activities, current problems and concerns, critical activities, schedule status, cost status, and corrective action taken or recovery plan proposed. Special notice and attention must be given to changes, actual and anticipated delays, extra work, and all matters that appear to be out of the ordinary. Trend meeting notes are important for documenting the present status of the project and also as historical documents should major disagreements arise later in the project. The owner's representative should be responsible for recording and publishing the meeting notes. Action Log Maintain an action log to keep track of open issues. Unless questions and requests

for information are recorded and reviewed regularly they stand a chance of becoming a source of delay and the basis for a claim. The action log needs to be a single document accessible to all project team members. Multiple lists are cumbersome to manage and confusing to team members. Each action item should be assigned a sequential number for quick reference in further discussions. Note the date that the item was raised, a short description of the item, and a person identified to be responsible for providing the response. Establish a date when a response is required in order for the design work to continue without delay and record the date of the response. Every response should be in writing to document the response and avoid any misunderstanding in a verbal communication. An example of an action log is shown in Figure 6. Using an action log can negate or reduce claims requesting compensation for unproductive time and rework necessitated by a late response. Potential Items of Cost Any deviation in engineering services or deliverables could result additional compensation.

might consider as work within the design contract could be viewed as additional work by the engineering firm. It is important to surface any potential items of cost as soon as possible for evaluation and a decision on whether or not to proceed with that item. The onus should be placed on the engineering firm to highlight any items considered as additional work prior to performing the work. The concept and design development phases of design are not as defined as the construction document phase. As the party responsible to provide the design, the engineering firm is in a better position to identify deviations. Engineering Progress There is no clear partial completion indication on engineering work as there is with construction work, but there are several methods of progressing that can be used: incremental milestones, start/finish, and opinion. Incremental milestones can be used on activities with subtasks that must be handled in sequence. Each subtask is assigned a percentage of the activity. Completing a subtask represents a milestone achieved and a percentage of the work completed. On smaller projects the incremental milestone method can be

the scope of in engineering in a request for What the owner

Figure 7Incremental Milestones for Individual Drawing Progress

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Figure 8Performance Graph

used on early design phases with the phase being the activity and the individual activities being the subtasks. The incremental milestone method can also be used on drawing preparation (Figure 7). The start/finish method can be used on activities that do not have definable intermediate milestones or where progress measurement would take too much time or effort. With the start/finish method, an arbitrary percentage is assigned when the activity starts and 100 percent is assigned when the activity is completed. This method can be used with any of the engineering activities or drawing preparation. The opinion method is the least definitive and should only be used on minor tasks that are difficult to measure. The person responsible for the activity makes an opinion of the progress achieved. This method is very subjective. A problem with the opinion method is that the responsible person tends to be optimistic with the progress achieved. The earned value for an activity is the activity's budget multiplied by the percent complete. The budget is the original estimate plus any approved changes. The budget can be expressed in work hours or dollars. When an activity is assessed at being 50 percent complete, 50 percent of the budget for that activity has been earned regardless of the actual work hours or dollars expended to accomplish that amount of work. Payments to the engineering firm should be based on the earned value, not on the actual work hours or dollars spent.

For the owner, paying the earned value insures that the project is paying for the work accomplished and not paying for correcting mistakes or unproductive time. For the engineering firm, when the actual cost exceeds the earned value, the dollars being expended are greater than the expected revenue. The engineering manager needs to take some action to improve performance on the trouble areas and possibly other activities to reduce the deficit. Discipline drawings could be grouped under one or several schedule activities rather than being shown individually on the engineering schedule. When such is the case, a drawing list identifying each drawing for that group is prepared. Progress is assessed for each drawing based on reaching a milestone. Progress for the drawing group is the sum of the progress for individual drawings. Remember to assign incremental values based on the drawing milestones to be encountered within a particular project phase. Performance Indicators Performance indicators depict how progress is affecting the engineering schedule and cost. A graph showing separate curves for the cumulative hours of the resource plan (the budgeted cost of work scheduled, BCWS), the earned work hours (budgeted cost of work performed, BCWP), and the actual work hours (Actual cost of work performed, ACWP) quickly shows the engineering status. Another graph can show the dollar expenditure for the plan, earned value, and actual cost.
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Any deviation of one curve from any of the others is an indication that the cost and schedule are deviating, for better or worse, from the expected performance. In Figure 8, as of February 11, the engineering work is running behind schedule by 100 work hours (BCWPBCWS) and the actual cost is exceeding the earned value by 60 work hours (BCWP-ACWP). A recovery plan is needed to improve the schedule performance and bring the project back on schedule. The earned value is the basis for payment. When the actual work hours exceed the earned work hours, there is a possibility of future claims for additional payment. The reason for the variance in work hours needs to be identified. The schedule performance index (SPI) is a comparison of what was planned versus what was done. The cost performance index (CPI) is a comparison of what was done versus what was paid. The indices are calculated by the following formulas: SPI = (cumulative earned workhours) / (cumulative planned workhours) CPI = (cumulative earned workhours) / (cumulative actual workhours) An index equal to 1.0 indicates the schedule or cost is on plan. An index greater than 1.0 indicates the schedule or cost performance is better than planned. An index less than 1.0 indicates the schedule or cost performance is behind plan. In the Figure 8 example, the SPI is
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0.81 and the CPI is 0.88. Both are unfavorable. Using dollars in place of work hours for the CPI calculations produces a more accurate CPI value since the reimbursable cost would be included in the calculation. The dollar value of the reimbursable cost compared to the labor cost is normally small, so the difference in the CPI index using either work hours and dollars is negligible. Change Management Maintain an engineering change log to record any changes in the engineering contract schedule or cost. The log can be incorporated into a contract summary table that starts with the initial contract amount and calculates a current contract amount as changes are entered. Lessons Learned Record lessons learned during the contracting process that could improve cost and schedule control on the next project.

variability in the engineering services to be performed. Using a disciplined approach to contract management will provide better project control and minimize the "surprises" having a negative impact on your project. N REFERENCES 1. Horwitz, Michael E., Progress Measurement in Engineering and Construction, Cost Engineers' Handbook. 2. Vogel, E.M., Defining Project Scope for Cost Control, Cost Engineers' Handbook. 3. Young III, James A., Design Phase Cost Control, Cost Engineers' Handbook. 4. Samad, Sarwar A., Managing Change Orders, Cost Engineering, October 2002, page 13. 5. AACE International: Certification Study Guide, Cost Control and Forecasting, Chapter 12. 6. AACE International: Certification Study Guide, Project Measurement: Contracting, Chapter 29. 7. American Institute of Architects, Architect's Handbook of Professional Practice, Volume 2, Scope of Designated Services (Document B162), 1973.

Available for Review The following book is available for review. The first reader to request the book will get to write a review about it for the Cost Engineering journal. If you are interested, send an e-mail to editor@aacei.org. The Lean Design Guidebook Everything Your Product Development Team Needs to Slash Manufacturing Cost, by Ronald Mascitelli Part of The Lean GuidebookTM Series This 312 page, spiral-bound book is in its first edition. It was copyrighted in 2004 by Technology Perspectives. ISBN 0-9662697-2-1. Its listed as a business/management book and is $44.95 in the US and $59.95 in Canada. The books promo states, Theres waste in your product designs, and its costing you a fortune! The Lean Design Guidebook describes 18 powerful and practical tools for manufacturing cost reduction, spanning the full spectrum from Six-Sigma design and value engineering, to Toyotas Production Preparation Process (3P). An integrated and immediately deployable approach to slashing costs and maximizing profits.

onitoring and controlling the engineering contract starts with the upfront effort to define the scope of the engineering work and preparing the request for proposal. Setting expectations and administering the engineering contract requires as much ABOUT THE AUTHOR Kenneth R. Davey, CCE, is a project attention as the project's technical aspects. controls engineer with the Eastman Better definition of the services and Kodak Company of Rochester, NY. He deliverables expected from the engineering became a Certified Cost Engineer in firm results in a greater understanding of 2003. He can be contacted by sending the project, a more realistic engineering e-mail to: kenneth.davey@kodak.com. schedule, and a more accurate cost estimate. An accurate assessment of the design Certification Papers - Each candidate status at all times is essential to contracting seeking certification as a Certified Cost success. The engineering schedule, Consultant/ Certified Cost Engineer resource plan, and estimate become the (CCC/CCE) is expected to write a baseline from which to measure progress. professional paper of a minimum of 2,500 With the baseline in place, trending words on a cost engineering-related subject becomes key to keeping the engineering and it must be submitted before or at the time of the examination. Each month some of the activities under control and minimizing top scoring entries are published as an the adverse impact on the project through example of what constitutes a good entry. early detection of schedule slippage and Other members and readers will also gain potential cost increases. Cost and schedule insights on current industry trends and control requires an effective progress projects with the publication of these papers measurement, a cost trending and in the Cost Engineering journal. forecasting system, and a change management system. Control of the engineering schedule and cost will not be absolute. The design phase of the project is part of the project definition process and as such has some

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