Engineering Encyclopedia

Saudi Aramco DeskTop Standards

Managing Cost During Construction

Note: The source of the technical material in this volume is the Professional
Engineering Development Program (PEDP) of Engineering Services.
Warning: The material contained in this document was developed for Saudi
Aramco and is intended for the exclusive use of Saudi Aramco’s employees.
Any material contained in this document which is not already in the public
domain may not be copied, reproduced, sold, given, or disclosed to third
parties, or otherwise used in whole, or in part, without the written permission
of the Vice President, Engineering Services, Saudi Aramco.

Chapter : Project Management For additional information on this subject, contact

File Reference: PMT10507 Rod Kuan on 873-9701
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Managing Cost During Construction

Content Page

SPECIAL CONSIDERATIONS IN MANAGING COSTS FOR LUMP-SUM

CONSTRUCTION CONTRACTS ....................................................................................... 1
Introduction .............................................................................................................. 1
Considerations in Managing Cost on Lump-Sum Projects .......................................... 1
Limited Contractor Cost Input ....................................................................... 1
Contractual Guidelines for Cost Reporting..................................................... 4
Importance of Owner's Cost Analysis ........................................................................ 4
REVIEWING THE CONSTRUCTION CONTRACTOR'S COST REPORTS ..................... 4
Introduction .............................................................................................................. 4
Considerations in Reviewing Contractor's Cost Reports............................................. 4
Essential Cost Report Information ............................................................................. 4
Cost Breakdown ............................................................................................ 4
Actual Cost Against Budget........................................................................... 4
Cost Performance To-Date ............................................................................ 4
Cost Trends and Forecast at Completion........................................................ 4
PREPARING A MONTHLY PROGRESS UPDATE (MPU) REPORT ............................... 4
Purpose of Monthly Progress Update (MPU) ............................................................ 4
Frequency and Report Period......................................................................... 4
Information Necessary to Prepare MPU..................................................................... 4
Sources for Information to Prepare MPU Report....................................................... 4
Information from the Contractor .................................................................... 4
SAPMT Developed Information..................................................................... 4
WORK AID 1: GUIDELINES IN REVIEWING THE CONSTRUCTION
CONTRACTOR'S COST REPORTS ................................................................................... 4

GLOSSARY......................................................................................................................... 4

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SPECIAL CONSIDERATIONS IN MANAGING COSTS FOR LUMP-SUM

CONSTRUCTION CONTRACTS

Introduction

From the Saudi Aramco Project Management Team's (SAPMT's) point of view, managing costs
for lump sum construction contractors carries significant importance. It is the responsibility of the
SAPMT to ensure that the payment schedule for construction contractors is compatible to the
progress made in the field. This compatibility between payment and progress should be
recognized and determined prior to the award of contract. The payment schedule and the rate of
contractor's progress are incorporated in the contractual documents for the typical lump-sum
contracts. Once included in the contract, the SAPMT is obligated to follow the terms,
relinquishing, to some extent, the right to demand or request project cost data which goes beyond
contractual agreements.

Considerations in Managing Cost on Lump-Sum Projects

Because of the nature of the lump-sum contracts, the construction contractor has certain
privileges to share only limited project cost data with the SAPMT. The SAPMT should ensure
that the cost information obtained from the lump-sum contractor is meaningful and adequate to:

• Assess the project cost performance

• Forecast the project cost at completion

• Identify any deviations from the baseline

• Recognize any adverse trends

• Document changes in project work scope

Limited Contractor Cost Input

The SAPMT should recognize information limitations prior to the award of a lump-sum contract,
and must identify the level of cost information that is essential to manage the contractor's cost
performance. The SAPMT should also take into consideration the necessary cost information
required to analyze the project's overall performance and to report the project cost status to Saudi
Aramco's Executive Management.

During the bidding process, the SAPMT should ask the contractor to break down their cost
estimate in sufficient detail to compare it with Saudi Aramco's own cost estimate data. This will
ensure that the contractors submit cost estimates in sufficient detail for good cost comparison.
This cost breakdown also provides good insight to the SAPMT about contractor's capability to
develop a cost estimate and effectively track cost during the execution phase.

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Some of the information that the contractors are privileged not to share on the lump-sum contract
may include:

• Breakdown of overheads vs. field labor cost

• Field labor hourly rates

• Cost of equipment rental

• Field management and supervisory cost

• Cost for temporary office and support facilities

• Cost of their subcontractors and vendors

• Incentive arrangements with subcontractors

From Saudi Aramco's point of view, some of the above information may be redundant to control a
project's cost performance for a lump-sum contract. However, this deprives the SAPMT from
analyzing some cost trends which are internal to contractor's controls. If these trends are pointing
in the wrong direction, then they could prove disruptive to project performance. Without detailed
information about contractors internal cost controls, the SAPMT may not be able to fully
ascertain the financial performance and capability of the contractor to complete a Saudi Aramco
project.

Contractual Guidelines for Cost Reporting

For lump-sum contracts, it is imperative that the SAPMT has clear cost reporting requirements
that are incorporated in the contractual documents. Once the contract is signed, then Saudi
Aramco loses its flexibility to modify cost reporting requirements from the contractor.

Saudi Aramco's cost reporting, tracking and forecasting requirements should be clearly spelled
out in the Cost Control Guidelines. If necessary, sample reports should be provided to guide the
contractor in the development of necessary project cost reports. Similarly, the frequency of each
report and level of details should be clearly specified in the Cost Control Guidelines.

In order to avoid any surprises in contractor's ability to meet Saudi Aramco's cost control
requirements, the SAPMT should review contractor's cost control system and its capabilities prior
to the award of contract. Lack of commitment to cost control by the contractor's management
and/or inadequate cost control system may be the early signs of poor cost performance by a lump-
sum contractor.

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During the evaluation of contractor's cost control function, the SAPMT should watch for the
following issues and must satisfy itself about contractor's capabilities:

• Contractor's management commitment to cost control

• Cost Control function and its effective utilization

• Relationship between Cost Control and Cost Accounting functions

• Qualifications of Cost Control Staff

• Existing Cost Reports and their effectiveness

• Change Order Management System

• Contractor's capabilities to analyze actual cost and develop project forecast.

As part of the review process, the SAPMT may identify Saudi Aramco requirements that the
contractor should be able to incorporate into their existing cost system. Prior to starting the
project, there should be a complete understanding between the SAPMT and the contractor on the
following cost control and reporting issues:

• Cost information to be developed and provided by the contractor

• Cost report formats

• Frequency of cost reports

• Contractor's cost control organization chart

• Change Order Management System

• Contractor's role in analyzing actual cost data and projecting cost at completion

• Cost information required from the construction contractor to feed into the Saudi
Aramco project status reports, (e.g., Monthly Project Update (MPU) reports, etc).

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Importance of Owner's Cost Analysis

Since Saudi Aramco typically receives limited cost data from a lump-sum construction contractor,
it becomes the responsibility of the SAPMT to continually analyze available information to
ascertain the project's cost performance. The SAPMT relies on its Cost Engineer and Planning
Staff to decipher the best possible trends and forecasts from the available cost information.

The SAPMT should use the following information to analyze and forecast the project's cost
trends:

• Contractor's actual manhours vs. the planned expenditure curve

• Actual manpower vs. the plan

• Change Order control log

• Changes in project schedules and their impact on the project

• Actual progress percentage completion vs. the plan

• Productivity based on performance to-date

• Erected quantities vs. the plan

By using the above information and analyzing actual vs. planned data, the SAPMT should be able
to establish the following cost performance indicators:

• Manhour projections vs. the plan

• Manhour requirements vs. the plan

• Experienced project productivity

• Forecasted labor cost

• Forecasted project cost based on Changes and labor cost projections.

With the above information, the SAPMT can fairly ascertain the cost performance of the
contractor, establish cost trends and develop a cost forecast for the project.

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REVIEWING THE CONSTRUCTION CONTRACTOR'S COST REPORTS

Introduction

The purpose of the Cost Control Function is to ensure that project costs stay within the budget,
and actual project expenditures follow the planned cash flow curves. A good Cost Control
Function should be able to identify any deviations and alert the SAPMT of their consequences.
An effective cost control has built-in mechanisms that focus the SAPMT's attention to areas
where cost problems may develop and does so before significant monetary or labor effects have
resulted. Potential cost problems are called to the SAPMT's attention in time for him to take
corrective actions aimed at eliminating or minimizing any budget overruns.

The best use of contractor's cost reports is to:

• Track project cost performance

• Identify cost deviations

• Identify causes for cost deviations

• Measure the effectiveness of corrective actions

It is the SAPMT's responsibility to ensure that clear guidelines, describing Saudi Aramco's cost
reporting requirements from the contractors, are developed. The guidelines should be
communicated and incorporated in the contractual documents. The SAPMT must ensure that the
contractors abide by these guidelines and provide Saudi Aramco with meaningful cost reports.

Considerations in Reviewing Contractor's Cost Reports

The SAPMT is responsible for receiving and reviewing contractor's cost reports, and determining
whether there are any adverse cost trends that may impact the project's cost performance.
Depending upon the size and complexity of the project, the construction contractor may be
required to provide several cost reports, each varying in magnitude of detail and focus.

The contractor's cost report should be designed in formats so that cost information is:

• Accurate

• Timely

• Informative

• Easy to Comprehend

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• Summary-level, supported by details

• Feeds into Saudi Aramco's project status reports.

If the contractor's cost reports meet the above considerations, then it makes the SAPMT's job
easier to analyze the cost data and develop overall project forecast. In reviewing and analyzing
the construction contractor's cost report, the SAPMT tries to meet the following key objectives:

• Monitor contractor's cost performance

• Identify any cost deviations and/or trouble areas

• Administer project change order system

• Develop Project Cost Reports to keep the Saudi Aramco Executive Management
informed.

The Saudi Aramco Project Engineer with support of the Cost Engineer, should stay on top of the
project cost status. By reviewing and analyzing the contractor's cost control reports, the Project
Engineer stays informed about the project's cost-to-date, expenditure trends, and forecasted cost
at project completion. With this information the Project Engineer can make necessary changes or
take appropriate actions to keep the project cost within budget.

In reviewing contractor's cost reports, the SAPMT should keep the following points in mind:

• Compare actual costs to establish cost baselines and/or contractual budgets

• Evaluate actual cost in context with the work accomplished in the field

• Consider the work scope changes/change orders and their impact on the project
cost

• Emphasize the need for analysis to identify causes of:

– Any deviations from cost plans

– Opportunities to improve cost performance

• Don't take cost data out-of-context to make judgmental observations

• Ensure that the contractor maintains a current change order log and tracks all the
changes from the budget

• Utilize cost curves for easy comprehension of actual cost data vs. the planned
commitment and expenditure plans

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• Ensure that the contractor's cost information is current, accurate and reflective of
the latest project status

• Identify performance to-date and use it for the development of cost forecasts at
project completion.

Essential Cost Report Information

The SAPMT provides the construction contractor specific guidelines about the essential cost
information that must be reported at prescribed frequency. The reporting formats and the levels
of the cost details to be provided by the contractor are agreed during the early phases of
construction programs. The contractor's cost information should be able to answer the following
project control needs:

• Establish project cost baseline

• Develop cost tracking curves

• Track actual vs. planned cost

• Determine cost performance trends

• Forecast cost at project completion

• Measure effectiveness of corrective actions

The contractor's cost reports should continuously address the above issues in order to manage the
cost during the construction phase of a Saudi Aramco project.

Cost Breakdown

The contractor's cost reports should include information which can be broken down to assess the
performance by areas and work categories. For effective cost control, the project cost should be
broken down in the same detail and consistent with the project's Work Breakdown Structure.

For example, if the project consists of several units/areas, then the cost report and the summary
cost at the project level, should be broken down by each unit/area See Figure 1, below.

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FIGURE 1 Project Cost Breakdown by Physical Areas

The next level of cost breakdown can be based on controllable cost categories, such as:

• Field labor

• Subcontracts

• Field-bought materials and vendor's costs

• Construction equipment

• Construction overheads

– Contractor Management and Supervision

– Temporary facilities
– Utilities
– Consumables/small tools

• Miscellaneous items unique to the project

For better control of the field labor cost, contractors are normally required to break the labor cost
by craft disciplines, e.g.:

• Piping

• Civil

• Structural

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• Electrical/Instrumentation

• Mechanical/Equipment

• Insulation

• Painting

• Others

With the cost broken down by the above categories, the contractor can sort and summarize the
cost into various manageable levels for easy tracking and prudent decision-making. For example,
it will be possible to obtain only field labor cost for the piping discipline charged to the crude unit.

Actual Cost Against Budget

The essential element of a good cost control function is to track actual cost expended during the
reporting period on a Saudi Aramco construction project. This actual cost information is essential
to track the expenditure rate with the cost baseline/budget and planned cost curves. For
meaningful use of the actual cost information, both the contractor and the SAPMT must ensure
that actual information meets the following criteria:

• Cost data is accurate

• Cost information is timely

• Cost is charged to proper accounts

• Cost breakdown consistent with budget breakdown and the project Work
Breakdown Structure (WBS)

• Cost for work scope changes is properly tracked

It is important to emphasize here that for a small construction project the contractor should be
able to provide accurate cost status within a week of the project cut-off date. Some essential cost
information such as labor cost can be developed within 2-3 days of the report cut-off date.

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The actual construction cost should be submitted in a tabular format Cost Summary Report (See
Addendum 1). The tabular format is also useful in documenting any Change Orders that may
have an impact on the budgeted cost baseline. The Cost Summary Report provides following key
information:

• Budgeted Cost by major work categories

• Cost of approved change orders

• Revised/latest control budget

• Expended cost this period

• Expended cost to-date

• Forecasted cost at completion

• Deviation from the budgeted cost baseline

The overall actual cost is then compared with the budgeted plan of expenditure through the report
period. That comparison, as shown in the Typical Cost Performance Curve (Figure 2), provides
valuable information related to any deviations from the planned cost expenditure curve.

FIGURE 2 Typical Cost Performance Curve

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Cost Performance To-Date

Based on actual cost of the construction project, the SAPMT and the contractor's cost staff
should analyze and determine the cost performance to-date. The cost performance to-date can be
tracked by developing the following information:

• Deviations from the planned cost expenditure curve (See Figure 2).

• Comparison of expended manhours to the manhour expenditure plan.

• Use actual progress percentage completion to develop a Field Labor Productivity

Curve (See Figure 3).

• Comparison of the actual cost/manhours expended per unit to the budget/estimate.

Productivity
Index

1.2
1.06
1.0

0.8 Actual
0.6

0.4

0.2

0 10 20 30 40 50 60 70 80 90 100
Physical Completion (%)

FIGURE 3: Field Labor Productivity Curve

With this information, the SAPMT can determine the cost performance to-date and develop a cost
forecast at project completion.

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Cost Trends and Forecast at Completion

Analysis of actual cost on the project provides valuable information about the cost performance
to-date, cost trends and forecasted cost at project completion. By analyzing the cost
performance, the SAPMT and contractor's cost staff should develop the project's cost forecast
based on the trends. Some of the cost trends identified by analysis of the project cost status data
are:

• Labor productivity

• Manhours expenditure rate

• Cost/Manhours to erect materials/equipment, (e.g., pipe)

• Overhead rates and its ratio to the field labor cost

• Comparison with the base estimate

The contractor is required to perform the analysis of the cost data and establish trends in order to
develop a cost forecast at project completion. Cost forecasting requires following key steps,
which include:

• Collection of accurate cost data

• Analysis of cost data

• Establish cost performance trends

• Identify causes for any deviations

• Utilize above data to forecast cost at project completion

Although the cost analysis and forecasting process start from the early phases construction, the
SAPMT and contractor's cost staff should be careful to interpret the initial cost performance. As
the construction goes through the learning curve, the initial performance numbers might show
actual performance worse than the planned estimate. It would be erroneous to interpret that data
to forecast project overruns. However, as the field work moves to the production phase (25 to
80%) the productivity should increase dramatically and incremental productivity will be better
than planned. The increased productivity during this phase should offset the poor productivity
during the initial and last phases of construction – the periods where the production is traditionally
below the overall plan.

The Field Labor Productivity Curve (Figure 3) graphically displays the effect of productivity
during the Construction Phase of a typical capital project.

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PREPARING A MONTHLY PROGRESS UPDATE (MPU) REPORT

Purpose of Monthly Progress Update (MPU)

The primary purpose of a Monthly Project Update (MPU) report, prepared on form Saudi
Aramco 6975 (See Addendum 11) is to communicate project status information from the project
managers to the Executive Project Management. MPU data is also used to prepare monthly
Budget Information Summary Reports (BISRs) for Saudi Aramco executive and corporate
management. The SAPMT prepares MPU reports for all projects under the control of
Engineering & Project Management that have received Prior Approval Expenditure Request
(PAER) or Expenditure Request (ER) funding. All the Job Orders (JOs) within a Budget Item
(BI) that fall under the responsibility of a single project manager constitute the scope of work
covered by one MPU.

When a JO is assigned to another department or project manager, a separate MPU for that scope
is prepared and updated by the assigned project manager. The status of the total BI scope is
compiled and reported on one MPU by the BI responsible project manager.

Frequency and Report Period

The SAPMT submits the MPU by the third SAO work day of each month. The first MPU is
submitted for the month following PAER or full ER funding approval. Distribution is according
to the instructions of the project manager. However, a copy must be forwarded to the Planning
and Scheduling Division (P&SD).

MPU reporting is discontinued when financial closure of TC-60 funds occur. The last report must
state "This is the last report" in the Comments section. On the MPU report, all dates are shown
as numeric month and year and financial data is reported in thousands of US dollars.

Information Necessary to Prepare MPU

MPU is a comprehensive project status reporting document prepared every month by the Project
Engineer/Project Manager to report project status to the Saudi Aramco Executive Management.
This document covers the project status as it relates to:

• Project cost - performance against ER funds. The cost information covered in the
report includes:

– Capital and expense expenditure plan and forecast

– Original ER funds

– Revised/Approved ER Funds

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– Expenditures, Commitments & Current Forecast for the total project

broken down into the following categories:

a. Engineering

b. Materials

c. Construction

d. Contingency

• Actual Project Progress compared to the original plan as shown on the Project
Completion Schedule (PCS)

– Engineering

– DC Material Procurement

– Construction

• Actual comparison of schedule milestones. Major milestone schedules are:

– Engineering Completion

– Mechanical Completion

– On-Stream Date

Initial scheduled information is obtained from PCS report. Any revisions in the PCS are reflected
in the MPU scheduled data to ensure that the current baseline is reflected in the MPU reports.

Sources for Information to Prepare MPU Report

The SAPMT is responsible for collecting accurate project data to keep the MPU report updated
with the latest status and forecast at project completion. To obtain the latest actual information,
the SAPMT relies on both Saudi Aramco sources and the contractors working on the project.

The SAPMT ensures that the actual cost, progress and schedule information obtained from
various sources is correct and reflective of actual project status. Based on the actual
performance, the SAPMT with the help of the contractor's staff also forecasts the project cost and
completion dates for the mechanical completion and on stream dates.

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Information from the Contractor

The SAPMT relies on the contractors to provide relevant project status information to update the
MPU report. The SAPMT reviews and approves the contractor data, before incorporating it in
the MPU report. The contractor provides the following actual data which is used in updating the
MPU report:

• Progress Percent Completion

– Engineering
– Procurement of DC Materials
– Construction

• Schedule Milestones
– Engineering Completion
– Mechanical Completion
– On-Stream Date

• Cost Status

– Actual expenditures

– Commitments to-date

– Expenditure trends

– Cost forecast at project completion

The SAPMT reviews, analyzes the above information and then incorporates it in the MPU report.
Although the information comes from the contractor, the SAPMT plays an important role in
refining the following information prior to its inclusion in the MPU report.

Milestone Dates - Entries relative to Original/Approved and Current Schedule dates for the
Engineering Completion/Mechanical Completion and On-Stream project milestones are made in
fields 9 through 17.

For Engineering Completion milestones (fields 9, 12 and 15), the Original Schedule date (field 9)
is based on the initial approval PCS, the Approved Schedule date (field 12) is based on the most
recently approved PCS and the Current Schedule date (field 15) indicates a current forecast date
if different from the approved schedule. Note that if the project manager anticipates a schedule
slippage or earlier completion than that indicated in fields 12 through 14, he shows the different
dates in fields 15 through 17. A revised PCS and approved PCR are not required for current-
forecast dates to differ from the approved-schedule dates.

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For Mechanical Completion and On-Stream milestones (fields 10, 11, 13, 14, 16 and 17), the
same instructions are applicable as indicated above for Engineering Completion milestones.

Beneficial on-stream dates identified in the ER brief must be highlighted as major milestones and
reported in the comments section.

Progress Status - Entries relative to Scheduled and Actual Progress Status in terms of Percent To
Date and Percent This Month are made in fields 19 through 30. The PCS revision number and
approval date are entered in field 18 for reference.

Progress Status is indicated by entering schedule data from the latest approved PCS for
cumulative progress and progress this month for the Engineering, DC Material Procurement and
Construction.

SAPMT Developed Information

The SAPMT collects and develops a significant portion of the information that is used to update
the MPU report for a Saudi Aramco project. The following information is obtained from the
Saudi Aramco sources:

Expenditure to Date - In fields 46 through 49 reflects cumulative expenditures from the most recent
ACAC report for project Engineering (field 46), Material (field 47) and Construction (field 48).
The Total (field 49) is the sum of fields 46 through 48, as contingency is not applicable as an
element of total expenditure.

Commitments - In fields 50 through 52 reflect cumulative commitment for project Engineering

(field 50), Material (field 51) and Construction (field 52). The Total (field 53) is the sum of fields
50 through 52, as contingency is not applicable as an element of total cumulative commitments.

Current Forecast - In fields 54 through 57 reflects the forecast of total anticipated final cost for
Engineering (field 54), Material (field 55), Construction (field 56) and the Total (field 57).
Contingency, if identified for specific needs, may be included. Contingency may be forecast for
committed, settled claims and forecast overruns but only when ER funds in all cost element
(engineering, material and construction) have been forecast to be spent.

Expenditure Forecast - Entries for forecast expenditures through project completion by quarter in
thousands of US dollars are made in fields 58 through 61. The Total Forecast (field 61) should
equal the Total Current Forecast (field 57) shown under Financial Status. Total project cost must
be forecast by its Total Capital (field 59) and Total Expense (field 60) portions.

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Expenditures are forecast as they are expected to appear as sub-ledger entries in the ACAC
report. An "A" is inserted in each quarterly forecast box to the left of the expenditure data as
each quarter becomes an actual expenditure.

The capital plan included in the business plan is based on MPU annual expenditure forecasts. The
forecast expenditures for the first year of the plan become, after Board of Directors' review, the
basis for accountability reporting. They must therefore, be prepared as accurately as possible.

Comments - A project manager's comments in field 65 may include:

• An explanation of scope/cost/schedule changes

• Significant existing or potential problem areas

• Action steps for improving project progress

• Any other comments the SAPMT deems appropriate. Those comments should
include a brief explanation of reasons for contingency usage.

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WORK AID 1: GUIDELINES IN REVIEWING THE CONSTRUCTION

CONTRACTOR'S COST REPORTS

The Work Aid provides guidelines in reviewing the construction contractor's cost reports.

Guidelines:

1. The Saudi Aramco Project Engineer should ensure that the following information
is provided by the construction contractor:

• Contractor's actual manhours vs. the planned expenditure curve

• Actual manpower vs. the plan

• Change Order control log

• Changes in project schedules and their impact on the project

• Actual progress percentage completion vs. the plan

• Productivity based on performance to-date

• Erected quantities vs. the plan

2. Based on the analysis of the above information, the Project Engineer should
establish the following trends and forecast:

• Manhour expenditure rates vs. the plan

• Productivity to-date

• Trends in terms of work scope changes

• Forecast labor manhours/cost

• Forecast construction cost

3. Use the above information to update the financial section of the MPU report.

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GLOSSARY

AFE Funds Authorization for Expenditure Funds.

BI Budget Item.

BISR Budget Item Summary Report.

DC Material Direct Charge Material. Items purchased for a specific

project which are not stock items.

ER Expenditure Request.

JO Job Order.

LSTK Lump Sum Turn-Key Contract.

MC Mechanical Completion. Plant or unit is ready for start-up

and commissioning.

MPU Monthly Project Update (report).

PAER Prior Approval Expenditure Request. Funding for the

purchase of long-lead critical material items and definitive
engineering design.

PCS Project Completion Schedule report.

SAO Saudi Arabian Organization.

SAPMT Saudi Aramco Project Management Team.

WBS Work Breakdown Structure.

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