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2. Development Phases of a Pipeline Project


Created by Guy Henley, last modified by Mustafa Abusalah on Feb 17, 2015

Pipeline projects are usually completed in five stages:

Three front-end loading (FEL) stages for business planning, facility planning and project
planning
Project execution stage
Start-up and operations stage.
THE ROAD TO SUCCESS covers the three FEL phases and the project execution phase.
The diagram below highlights a staged-gated project system and should be reviewed in
conjunction with the minimum data requirements and activities for each FEL phase described
in section 5.2.
It is imperative that the foundations of any project are sound: front-end loading (particularly
FEL 1 and FEL 2) forms a key part in providing the necessary framework and structure for a
successful project.

Active Participants

Active participants through the lifecycle of the project have been highlighted above.

2.1 Front-End Loading (FEL) Phases


Some of the key considerations that need to be defined during the three FEL phases include:
Product availability

Applicable codes
and standards

Design temperature

Stations (compressor, pump)

Design capacity

Above ground installations (valve


stations, pigging stations, metering
stations, off take stations)

Risk of natural hazards


and human threats

Pipe OD

SCADA/telecoms

Pipeline route and its


right of way corridor

Pipe wall thickness

Maintenance and
inspection requirements

Topographic and
geotechnical data

Inspection requirements

Materials (linepipe,
valves, tees, flanges,
traps)

Pigging devices/integrity
assessment

Corrosion allowance

Protection requirements
(trench depth)

Inspection philosophy

Corrosion coating,
field joint coating

Expansion mitigation

Schedule

Cathodic protection

Isolation valve spacing

Insulation

Crossings design

Cost estimates

Operational
philosophy (hydrates,
waxing, asphaltenes)

Overpressure protection
(surge protection,

linepack)

Construction methodology

Design life

Leak detection

Pipeline operations

Product quality

Camps
Clearing and grading
Material logistics
Ditching
Welding
Pipe bending
Field coating
Backfilling
Hydrotesting
Final grading

Design pressure

Metering requirements

2.1.1 Business Planning FEL 1

Before starting a project, the pipeline owner/investor (the body funding the project) must
prove the economic viability and need for the project i.e. will the project produce the required
revenues and profit? This phase captures the reasoning behind initiating the project and can
take considerable time to prepare.
FEL 1 includes:

Business case
Strategic objectives
Economic analysis
Project expectations
Market analysis
Competitors review
Environmental constraints
2.1.2 Facility Planning FEL 2

The purpose of FEL 2 facility planning (sometimes referred to as feasibility, preliminary, or


pre-FEED), is to ensure the selection of an optimum solution and put some details behind the
project. Here we can confirm the physical viability and anticipated cost of a project before
any unnecessary time and energy is wasted. This stage of the plan can take from 2-6 months
depending on project complexity.
FEL 2 facility planning includes the review of:

Environmental and social issues


Routing
Pipeline dimensions (OD, WT, length)
In-line facilities (pumps/compressor stations)
Regulatory and governmental requirements
Preliminary schedules

Led by the owner, developer or an appointed and experienced engineering contractor, these
issues are performed by a joint team and should include a range of technical, engineering,
environmental, social and legal specialists. The level of cost estimate at this point is typically
+/-30%.
2.1.3 Project Planning FEL 3

Project planning or the FEED phase looks to develop the approved selected solution by
narrowing the cost estimate to +/-15% and achieving a higher level of development schedule.
At this point any project showstoppers would have been identified as part of the
environmental and social impact assessment process and suitable mitigation measures agreed
with the relevant stakeholders (as part of the project consent). It is only when consent has
been granted that project sanction takes place and particularly since it is then possible to
place material orders for long lead items (LLIs) at this stage so as to meet the development
schedule. Project planning could take from 6-12 months depending on the complexity of

project and the environment through which it is routed. If the pipeline has not managed to
avoid sensitive environments, timescales for the FEL process can be extended by many
months whilst detailed ecological or cultural studies are performed
In comparison with plant projects, the cost of FEL developments for a pipeline project are
typically lower, except for possibly international cross-border pipelines or complex systems
such as high temperature pipelines (design temperature > 70C), high pressure pipelines
(design pressure > 200 bars), or fast track projects.
However, whilst the cost of the development activity is lower, it is still significant and often
underestimated. Pipeline project facility planning (FEL 2) for example can range from one
third to three quarters of the activity associated with plant developments. However, the time
taken can in certain circumstances be longer.

2.2 Key points to address during FEL


For many project teams the development of a pipeline may be a once-in-a-career event so
experience brought to the development may be limited. This often results in the required
technology and development processes for pipelines being underestimated by the new developer
with the design and plan far exceeding that expected, especially considering the management and
approval processes which take time and effort to put into place.

Directed by the inexperienced, a new development can be guided down the wrong path,
which can lead to disappointing results, such as extended schedules, increased costs and an
unfit-for-design installation.
In order to limit disappointing results the following key points should be addressed:

Hire fully-qualified multi-skilled engineering resources with relevant experience


Design basis, operational and HSES philosophies are in place to fully define the safety, performance
and operation requirements of the completed installation
Ensure adequate data is available for engineering (design conditions data, social and environmental
data, geotechnical and topographical data)
Provision of pipeline technical designs to ensure clear and concise installation and that construction
specifications and drawings can be produced

The key issues to be addressed will depend on the project type, size, length, location, terrain
and whether it is inter-country. This will include a review of land-take, biodiversity, heritage,
pollution control, agricultural disruption, traffic management, loss of remoteness,
communicable diseases, employment and trade opportunities.
Besides, no matter the type and size of the project, it is essential for investors/owners to
develop their project execution planning from the early phases of the front-end loading. Too
often this task is left to the construction contractor at the beginning of the project execution
phase or during FEL 3 in case of EPC projects. Whilst the establishment of a very exhaustive
and detailed project execution planning by the contractor is essential at that time (refer
to section 3.2 and Appendix 3.2.1), the investors/owners should initiate it to control in a
disciplined manner the progress of the project development. This should include contracting
strategy; team participants and roles; integrated programmes with critical path activities and
items; plans for health and safety; environment and quality; controls; costs and schedules.

It is also important to remember that a pipeline project is a multi-discipline (joint team) effort
involving pipeline engineers, metallurgy, process, control systems, electrical, piping, civil,
mechanical as well as social, cultural and environmental specialists. Besides the pipeline
design, other activities include SCADA and Telecoms, power supply, inline facilities such as
valve stations, metering stations, scraper trap station design, rotating equipment selection and
specifications.
All the activities in FEL phases 1, 2 and 3 are key to attain a good foundation for the project.
It will nothelp the schedule if a better development option has been found in FEL 3, because
it will include retracing back to FEL 2. This is not an unusual occurrence resulting from a
poor study/feasibility phase. A good study phase needs an open forum for ideas where all
ideas are equally considered, however outlandish.
All areas in business planning are key. It is important that an engineer with broad experience
is involved in this phase, who could highlight key driver issues, such as environmental,
social, pipe parameters (OD, length), in-line facilities and cost metrics.
For the facility planning phase, there should be some joint environmental and construction
expertise input, particularly in developing the construction schedules. Environmental
restrictions can play a major part on the length of the schedule, or the number of construction
spreads required to meet a particular schedule. This is also the phase when health and safety
requirements to achieve the zero accident and no harm to persons will be taken on board
and further developed in the project planning phase to be fully in place for the construction
and operation phases.
For project planning, a whole range of issues and experts will need to be consulted, so as to
address the potential key issues described above and also detailed in section 5.2.
The diagrams hereafter illustrate the fact that the front-end loading phases of the project are
where the owners/investors have the most influence and impact on the project with the least
cost and expenditures. Key decisions left to later in project lifecycle come with a penalty of
high cost, with little influence to change the outcome.

Fig. 1 Influence and expenditure profiles over tim


Fig. 1 indicates that at the early phases of the FEL process whilst expenditure is low, big
decisions are made. Where will the pipeline go? Will we build a pipeline or use ships? The
ability to influence the form of the project is high. It is thus essential at this stage that the
investor and the engineer work closely and consider the value added outcomes of all potential
solutions. For this to be effective, experience is essential.
As the project moves to the next FEL stage the major project decisions have been made but
critical parameters are yet to be fully addressed. The ability to influence the project is still
high. It is therefore fundamental at this stage to gain more understanding of the route and of
the system design. The system design will define the pressures, flows, pipe diameters and
pump or compressor station requirements. However the main drive is to gain more
knowledge of the route options and to remove uncertainty. Key factors for review are
generally the pipeline profile, soil conditions and potential environmental and social
constraints. As the expenditures are still low constraints such as unstable terrain or
environmentallysensitive areas can be coped with by major re-routeing without disruption.
The influence and expenditure graph shows how progression through the project phases
results in a lower ability to influence the design. On a pipeline this is truer than with a plant
development. The influence line drops off faster through FEL 3. However the expenditure on
a pipeline even at this stage is low in comparison with plant developments. It is therefore
essential to ensure experience and knowledge is used effectively at these early stages of the
work. During FEL 3 it is likely that commitments will be made to authorities and land
owners, the form of the project is almost fixed.
Contingency Progression Per Project Phase

Fig. 2 The balance of contingency and estimated cost changes through the 5 project stages

As with most standard estimating methods, the early stages of the project are called
screening estimates or conceptual estimates. In these early stages of the project things
remain undefined and a large contingency is required to cover the expected but unknown
aspects of the design.
In pipeline terms the knowledge of soils and land issues as well as an optimised system
design has not been completed. The routeing is based on maps or images and the sizing based
on norms and simplistic assessments. The project estimate baseline at this stage is therefore
made up of the estimated price and an almost equal level of contingency. At this stage of the
project this is not a real problem for the investor as he is looking to provide data that provides
him with comparisons with other potential developments and to see if his expected returns
can be realised. It should be realised that contingency is part of the estimate and is not
discretionary or padding: it will be spent. Addition of arbitrary contingency to cover the
estimate shortfalls is thus not a tenable solution. What remains a problem at the early stages
of development is the project risk and how this will impact planning and quality or certainty
of the baseline. Contingency should not be confused with design allowances or development
or with management reserves (see Appendix 3.4.5 Cost estimate of a pipeline
project/contingencies).
As the project leaves FEL2 the feasibility has been tested the routeing information has been
improved and the sizing of the system has been scoped and understood. The level of
unknowns is lower and the contingency can be reduced.
Throughout the stages of the project the knowledge and certainty improve until the developer
is confident enough to sanction the full expenditure.
It can be seen that if the work is performed well the out-turn cost or baseline cost of the
project remains the same and contingency and unknowns are exchanged for certainty and
knowledge. We are reducing project risk and becoming more confident of the baseline
estimate.

Fig. 3 Reduction of project risks during the FEL and execution phases
Figure 3 illustrates that during the FEL phases the reduction of project risks is the most
effective. It also shows how the total process of FEL and execution fits together. Of course
even at project handoversome operational residual risk still exists although if the process has
been followed correctly this should be minimised.
Conclusion

This section has stressed the importance of properly planning and executing the FEL 1, FEL
2 and FEL 3 phases towards safely executing a quality construction works within the
optimum cost and schedule. It requires the early involvement of all experts under an
integrated team during these phases covering the following topics:

Safety
Environment
Construction
Public relations
Operations
Pipeline design
Socio-economic factors
Security

Further information on the minimum data requirements and activities for each FEL phase is
included in section 5.2.
At a certain point of the FEL 3 a baseline will be established for the purpose of agreeing the
construction contract. This is the subject of section 3.

3. The Baseline of a Construction Contract


The recommendations below can be classified in four categories:

Detailed definition of the scope of works, of the physical conditions of the site of the
environment and of the socioeconomic and local constraints. This will define the baseline of
the contract to be entered by the parties.
Establishment of a detailed project execution plan, including a fully resourced programme of
the works described in the baseline to monitor progress and promptly assess the time impact
of changes to the project or to its environment.
Recommended extent of the cost information to include in all the contracts may vary from
just one of:

Cost plus
Bill of quantities
Activity schedule
Lump sum

or a combination of the above, to enable a prompt evaluation of the cost impacts of:
Changes to the project or to the environment of the project
Mitigation measures elaborated to reduce the adverse consequences of the above changes
The conditions of contract
In this section and the following section 4 , the owner/investor will be called the client
being party to a contract entered into with the contractor, the other party.

3.1 Defining the Scope of Work


The scope of works also includes the physical conditions of the site, of the environment and of the
socioeconomic and local constraints.
3.1.1 Scope and Physical Conditions

Definition of the pipeline route/right of way (see also section 5.1.1)

The pipeline route and its impact on the environment will need to be considered, justified and
approved by regulators, the general public and land owners.
Hence, consultation is a key part of routeing. Key environmental and regulatory steps are
illustrated overleaf.

The development of a pipeline route commences with the known start and end points, for
example a gas field and a LNG terminal. Sometimes the integration of the terminal location
with the route which a pipeline can take will also be a variable to consider.
Once the end points are determined, the routeing becomes an iterative process starting with
the consideration of a wide area of interest and several potential corridors. As major
constraints and cost drivers are considered the investor/owner and the engineering team begin
the process of refinement. The chosen corridor which emerges is progressively narrowed as
the FEL process continues and as more data is available. At the end of FEL 3 the route is
defined as the final right of way (ROW).
Typically the route alignment steps are:

Multiple 10 km wide corridors between the two end points of the pipeline
10 km-wide corridor of interest
Desktop routeing/satellite imagery
500 m-wide preferred route corridor (large scale maps)
Route using route maps with scale 1:50,000
100 m-wide specified corridor (more detailed maps)
Large/scale routeing: detailed routeing using 1:5,000 to 1:10,000 maps
20 to 40 m-wide construction corridor (detailed routeing/preliminary surveys)
Site reconnaissance; surveys; soils data; initial consultations with statutory authorities; preliminary
alignment sheets
8 m-wide permanent corridor (ROW) (final surveys)

Special attention is to be paid to ROW sections which may not be fully available at the
commencement of the works due to land availability or environmental constraints. They
should be clearly identified and become a programme constraint similar to sections where
flooding or snow prevents access part of the year. Anticipation of such situations is more
productive than facing the problems once the full spread(s) is in progress and suddenly
stopped or disrupted.

Other land areas beyond the linear construction corridor of the pipeline are required for:

Access routes to the right of way


Designated areas for camp sites
Waste disposal locations
Pipe storage area
Borrow pits
Benching (on side slope)
Additional working space adjacent to road, rail, water and special crossings (such as
archaeological areas or environmental constraints)
Temporary nursery sites/translocation areas for storing turves, plant material or temporary
removal of protected species
Compensation or accommodation works (agreed as part of the consent/easement)
Temporary airstrips and helipads

Temporary right of way for laying pipelines to water sources for the provision of water tests
These areas should be established and detailed as part of the FEL process.
Description of the geological assumptions together with an allowance for variations to be part
of the baseline
Seismic and volcanic constraint
Crossing assumptions
Other special physical constraints resulting from environmentally sensitive areas, archaeological
surveys etc.
Specific quality requirements for pipe and pipe protection such as:

Land pipe requirements (metallurgy for steel pipes etc.)


External mainline pipe coating, field joint coating and supplementary mechanical protection
system (see section 11)

Description of the extent of early works which are being carried out by others to provide, for
instance, additional accesses to the site, drainage works, ROW clearance, crop removal and of their
expected completion dates
Description of additional site investigation or product testing (by whom) to conduct at the
commencement of works and to include in the baseline
Detailed description of the standards of reinstatement required
3.1.2 Health and Safety, Environment, Socioeconomic and Local Constraints

The HSES requirements are essential aspects of a project development. Historically, whilst
pipelines provide a very safe and environmentally friendly form of transportation, lost time
incidents and other issues are still evident during construction. HSES costs time and money
to implement effectively and must be planned for in depth from the outset of the
development. Commercial pressures may develop to scale down costs at all levels of a
project. Clients must prevent any scope or cost reduction in the field of HSES and define
clearly from the onset the detailed requirements as described overleaf.

The environment and the socio-economic and local constraints should be clearly defined in
the contract documents and are generally contained in the social and environmental impact
assessment. A summary of the commitments made as part of the pipeline routeing and FEL
stages 1, 2 and 3 should be included in the scope of works as part of the construction contract
and identified on the alignment sheets.

Detailed Health and Safety requirements in terms of organisation (detailed list of qualified
personnel), provision of facilities (training schools, hospitals, infirmaries etc.), training requirements
and expected targets to achieve plus allowance for additional resources to be part of the Baseline
Health provisions including working in contaminated land, dust inhalation, extremes of temperature
and working time restrictions
Transmission of pests, diseases and alien species (plant material), particularly when working in
intensive agricultural regions, or animal husbandry areas
Detailed environmental requirements (limitations on emissions, surface discharge, effluents, noise,
waste selection and treatment; special treatment fauna and flora; special measures near living areas
etc.) and allowance for potential additional requirements to be part of the baseline
Precise description of the weather assumptions to be part of the baseline together with the
assumptions for flooding, snow and storms, all of which have a significant influence on the
programme of works and on the way resources are mobilised
Detailed security measures envisaged in the context of the country where works will be carried out
Special attention to the socioeconomic environment including the extent of the required actions to
be undertaken by all parties (i.e. public meetings, brochures, media publications, TV programmes
etc.) in this respect should be well defined in a plan and part of the baseline with whatever
allowance necessary to include. They should include inter alia the requirements of the laws of the
country, of any special agreement made at government level or possibly of the financial institutions
Where applicable, description of the specific local constraints negotiated with the local governments
or administrations: they may cover employment conditions of labour and staff, working hours,
restrictions on employment of foreign labour and staff, procedures for permits and licences, custom
procedures and restrictions, definition of the laws and regulations to apply to the project,
accommodation works agreed with the local landowners or local administration organisations
Archaeology and protection of cultural sites of significance should be dealt with sensitively and in
accordance with the consent conditions and local laws and customs

It is the responsibility of the client and its technical advisors (engineers, land agents and
environmental advisors) to provide the contractor with a clear summary of the restrictions
identified along the route of the pipeline and of the commitments which have been agreed
during FEL phases 1, 2 and 3.

3.2 Programming the Work


The detailed project execution plan established for the construction phase (see Appendix
3.2.1 for detailed recommendations) of the works defined in the baseline will result in a fully
resourced programme of works (manpower, plant, material, facilities) as defined below.
A detailed March chart for all the linear activities combined with standard critical path
method (CPM) programmes for fixed installations (such as pump/compressor stations or
valve stations) should constitute this resourced programme.
The March chart should incorporate all the details of the terrain (roads, railways, waterways,
electrical power lines, underground utilities), expected ground conditions, anticipated weather
in relation to the seasons and geography (mountains, low lands, arid zones, deserts, swamp

areas), environmental constraints, local community constraints and political constraints as


defined in the baseline.
It is the recommended tool to assess correctly the complexities of a pipeline project, to
evaluate the criticalities of the programme of works, to follow up progress and promptly
assess the impacts of disruptions, changed conditions and stoppages as compared with the
baseline (seeAppendix 3.2.2 - A Primer to March Charts).
A typical sample is presented overleaf:

Extract from the March chart above:

In order to arrive at an acceptable construction programme, the following should be


established in detail:

The minimum mobilisation time necessary for the contractor and the client (the engineering
team where applicable) to assemble their teams, who will have to familiarise themselves with
the project as a first step, then plan in detail and mobilise resources. Considering the pressure
to get the project in operation as early as possible this preparation time can often be reduced
to nearly nothing: this is certainly detrimental to achieving a proper kick-off to the project.
Indeed the teams who tendered a contract on the contractors side and the teams who
prepared and evaluated those tenders on the clients side are not always the teams who will
execute the project. Therefore a minimum preparation period varying from a few weeks to a
few months, depending on the size and complexity of the project, in addition to the proposed
construction programme, would certainly lead to a smoother development of the operations
(unless that preparation period has been included in the tendering process as a step in the
finalisation of the contract with the preferred tenderer)
The average rates of progress for the different activities I, II, III,which are dependent on
the terrain, the ground conditions, the weather at the considered period of the year, the
environmental constraints, the local constraints and obviously the resources allocated
The minimum time lag between two activities, A0 (between activity I and II), B0, C0,
shown in the March chart extract above, should also be clearly established taking into
consideration:
The contractors own constraints (learning curves, changing the teams of local labour when
crossing different regions, maintenance of equipment, breakdowns)
The expected weather conditions at a given period of the year which may affect progress of
one activity more than one of the following activities (e.g. rain at PK 100, good weather at
PK 80)
The clients constraints: the client may demand that allowances for minor stoppages should
be incorporated (and priced) in the base programme (e.g. 2 days per month to cater for design
considerations, local disturbances, shortage of some supplies etc.) or that there should be a
limit to the distance of the various phases of the works
With such a tool the most critical sequences of works will always be highlighted and the
effects of changes or disruptions to the project on the programme of works can be promptly
assessed.
Any areas where the contractor considers the information is incomplete or alternative
routeing/construction/mitigation measures should be considered should be clearly identified
early in the construction programme to allow for consultation with the client, their advisors,
local landowners and stakeholders.

3.3 Contract Price Information to Facilitate


Evaluation of Changes
Experience shows that the major cost impact of changes on projects is the additional cost of
teams and resources related to the additional time they spend on site either working with full
running costs or in standby with reduced running costs.

Changes to the baseline/disruptions/stoppages have in general two consequences for a


project:

The duration of certain activities will be extended


There might be a need for mobilising additional resources to mitigate an overall extension of
project duration
In this section and in section 4 the word cost is understood from a clients point of view: it
means the price paid by the client to the contractor which includes the contractors direct and
indirect costs, its overheads and profit.
Therefore, in order to allow both client and contractor project management teams to promptly
evaluate the cost impacts of changes and/or disruptions to a project, the contract price should
include the breakdown of the weekly costs of the main working crews in operation (including
energy, spare parts and consumables for the equipment and machines used as well as labour
and staff costs including food, lodging and transport) and the weekly costs of the site
overheads (offices, stores, yards etc.), as well as that of the management overheads,
combined with a schedule of the costs of the same workin crews in standby (when no energy
and consumables for major equipment is used), and of the costs of potential mitigation
measures (such as cost of moving different crews in relation with distance). All weekly costs
would exclude the cost of incorporated materials since their cost impact is quantity-related
instead of time-related.
Examples of time-related costs (weekly costs) for a pipeline contract together with examples
of evaluation of time and cost impacts of stoppages are attached in Appendix 4.2.1 Examples of Evaluation of Time and Cost Impacts of Full Stoppages or of Slowdowns.
In the case of cost plus type contracts, the actual costs plus fees are compared at given
intervals to a bill of quantities or an activity schedule, which should include such time related
cost information as described above.
In the case of bill of quantities or activity schedule type contracts, these time-related costs
should be incorporated as bill items or activity items in the pricing document.
In the case of lump sum contracts, a breakdown of these time related costs should be in an
appendix attached to the tender.
This time related cost information, together with the fixed costs for mobilisation of teams,
equipment and facilities (which generally form part of most contracts but should also be
included in the lump sum tenders), are essential management tools to assess changes.

3.4 Considerations in Developing the Conditions of


Contract
Traditionally, contracts terms tend to be issued by clients, and market forces and/or financial
institutions tend to drive in their favour. Too often risk allocation continues to be pushed from one
party to another depending on prevailing environmental or market conditions, with little
consideration to the loss of potential value and earnings incurred due to inattention to reducing the
risk to begin with.

However, as a general principle, the conditions of contract (general conditions and particular
conditions) should not be overly favourable to one contracting party vis--vis the other(s).
Indeed, experience shows that construction and operational risks are best allocated where
they can most appropriately be managed and borne. A fair contract helps to significantly

reduce the risks of conflicts, delays and disruptions when difficulties occur in the
performance of a project by clearly identifying the agreed risk allocation and providing fair
compensation for bearing them.
Several (unsuccessful) attempts have been made in the past to develop standard balanced
contract conditions, applicable to all types of major onshore pipeline projects. The failure of
these attempts was largely due to the fact that national clients are bound to abide by the local
contracting practices and global clients have, over the years, developed their own contract
conditions which, they feel, can adapt to the varying context of their projects.
3.4.1 Pipeline Project Specifics

Whatever the conditions of contract used, the recommendations above acknowledge the
specificities of onshore pipeline projects as well as the uniqueness of their sites. Unlike the
relatively small concentrated areas of other construction projects (such as terminals,
pump/compressors stations etc.), onshore pipeline projects often extend over several hundred
kilometres, crossing state and/or international boundaries.
The likelihood, therefore, of encountering conditions different to those upon which the initial
design and construction programme were predicated is higher than in other construction
projects, hence the requirement for a good FEL as the likelihood of changes is inherent to
pipeline projects. This requires that the parties analyse potential risks at an early stage (during
the bid phase) and that the contractual baseline is set accordingly to ensure that anticipated
risks are fairly allocated. Both parties can benefit from prudent front-end loading (see section
2).

3.4.2 Clarifying Risk Responsibilities

As demonstrated here, the baseline of a good pipeline construction contract must include a
clear definition of inclusions and limitations for key risks. The scope of works provides the
basis for an agreement between contractor and client. Under ideal circumstances this would
be sufficient for an onshore pipeline contract.
However, in reality, risk events, when they occur, lead to contractual disputes unless the
contract addresses these issues. Contracts should therefore include terms which allow
sufficient commercial flexibility to address these inevitable variances while still preserving
the performance incentives inherent in the commercial terms for the baseline portion of the
scope.
This requires the recommended spirit of trust and mutual co-operation between the parties
and the situation where lack of clear and concise scope and engineering definition leads one
party to consider exploitation at the cost of the other should be avoided. The client may see
under-priced lump sum bids as a benefit, whilst the contractor may see the opportunity for
change and scope increase during the execution of the work. In actual fact the result is
disputes, delays and additional costs seldom to any partys benefit.
Exemplary preferred conditions of contract have been achieved in international onshore
pipeline projects. Clauses of general interest for all construction contracts such as exchange
risk, country risk, indemnities, insurance, payment terms etc. are not further developed herein
as they may be found in general contract literature. There are certain contractual topics that

have a particular importance for onshore pipeline projects. The guidelines included
in Appendix 3.4.4 address the following:

The weather conditions/inclement weather


The environment and archaeology
The definition of (and access to) the site
The programme (and adjustment thereto, including compensation)
The relations with third parties (pipeline projects involve an unusually large number of third parties)
The supply of materials
The ground conditions
The responsibility for design and constructability
3.4.3 Probability of Risk and Cost Outcome

Many a contractor has fallen into a trap associated with risk pricing when clients insist in
having the contractor to bear some of the risk impacts. The desire to achieve commercial
advantage sometimes tempts a contractor to bid a lump sum contract based on a calculation
of the estimated costs of inherent risks.
The baseline cost estimate is normally based on the expected cost of the project. This cost
includes the required contingency commensurate with the project definition at that stage of
the work, where the contingency is added to the base estimate to a level that is equivalent to
the 50/50 (or P50 see graphic below). Onto this a bidder will add reserve that provides his
company with the level of assurance that the execution of the work with all normal risks will
achieve his goal of profitability. This level of bid is normally assessed at a level where the
company can be 80-90% sure of the outcome or in general terms the P80 estimate (this
process is described further in Appendix 3.4.5 - Project Cost Estimate and Contingency)
Whilst some bidders may be sufficiently confident in their ability to execute work to an
estimated budget based on the 50/50 estimate, or with little-to-no reserve it does assume that
the bidder has 100% definition of all risks and unknowns and that his price is complete. This
is an unlikely condition and normally results in the bidder placing a high reliance on claims
or changes to his advantage.
Some project risks occur in a continuous and incremental fashion, so that the differing price
points considered by different bidders will only vary from the actual cost outcome by degree,
leaving the bidder a marginal profit or loss in the end.
However, projects often have discrete risks which result in an all or nothing cost impact.
While the probability of these risks is still variable, their cost outcome is not. Competitive
pressures often tempt contractors to bid such risks at less than expected cost on the hope that
the unconsumed contingency will become additional profit or can be recovered through
claims. When the risk does arrive and is not sufficiently supported with funds, the expected
profit is not only lost but profit is drawn from other aspects of the project to offset the risk
cost impact. Contractors feel forced to recover their incurred risk costs from their clients,
often creating an uneasy relationship with their clients. This inevitably leads to commercial
stress and can work to unravel the contractual arrangements made between the parties.
The alternative advocated here is to be overt in the contract as to how much of the risk cost
impact is included in the baseline and how the excess or residual risk will be addressed
commercially. Clients are especially urged to avoid entering contracts where known risks
have been aggressively priced at a point below the likely cost impact. The better answer is to

have the client bear the risk and avoid the commercial inefficiency of potentially paying for
the risk twice once in the baseline and again in a claim!

Contracts need to contain an appropriate contractual and commercial mechanism to deal with
(unanticipated) risks that eventuate during the course of the work despite parties best
efforts to counter, factor in, or eliminate these risks. For risk not accounted for in the
baseline, parties can agree, in advance, the form of compensation and the method of
calculation of the adjustment.
Therefore, the characteristics of onshore pipeline projects make it more important to attain a
well defined allocation of risks between the parties. Furthermore, parties need to determine
early on how they are going to deal with residual execution risk. This is fundamental to
achieving optimum contractual co-operation between the parties and minimising conflicts
surrounding eventual contract adjustments.
3.4.4 Conclusion

The baseline of a construction contract needs to be clearly established including scope of


work, the detailed execution plan with a resourced March chart programme for all linear
activities combined to CPM programmes for all fixed installations, the cost elements and the
conditions of contract.
There may be circumstances when the baseline has not been sufficiently developed at time of
going to tender and needs to be improved through early works to arrive at a better contract.

Section 4 will review the main risks of pipeline construction contracts and propose mitigation
measures which can be implemented at various stages of the development of the project.

Appendix 3.2.1 - Recommendations for Establishing


Project Execution Plan - Construction Phase
3.2.1.1. Introduction
The project execution plan (PEP) is a substantial portion of a pipeline project development. In this
document the selected contractor has to explain the way he plans to execute the project describing in
detail the assumptions and all the considerations taken into account.
A PEP is a tool that will help identify, during project development, all the strengths and weaknesses of
the Plan which in the end will serve to define risk mitigation actions.
Through this document, the clients get a very clear understanding of the extent of knowledge and
evaluation done by the contractor, who shows his level of familiarity with all the characteristics of the
project and the site.

3.2.1.2. Project Background or Baseline


This is a description of the findings that determine the baseline which will serve as a basis to define
the project execution strategy. In order to have a detailed baseline the PEP has to describe:

The applicable legislations of the country where the project is to be executed


The labour legislation and manpower availability
The evaluation made of suppliers and countries of origin for long lead items
The owner organisation for the project including evaluation of the financial capacity
The applicable and required technologies including others to be considered
The basic terms of contract and its deadlines
The project site including evaluation of historic weather conditions, registers and soil characteristics
The existing access facilities and transportation means in the area
The existing facilities to supply materials, tools and spare parts
The existing sources of food and available number of lodging facilities
The capacity of the existing fuel and grease facilities in the area
Customs import and export conditions for equipment and materials
Immigration conditions and language requirements to bring professionals and skilled HHRR
Health and safety requirements
Existing communication facilities

3.2.1.3. Project Execution Organisation


In this section the contractor project management team will define the organisation chart that will be
used to execute the project. It is very important to identify the name of the key personnel early on and
make sure of their availability and commitment to remain in the project from the beginning of the
project needs until the end of their assignment.
Special attention should also be given to the organisation chart that the client intends to set up for
project follow-up and their location in the area. This is essential to maintain good communication at all
project levels.

The organisation chart should also depict the interface with the headquarters and define the
contractors representatives assigned to the project in case of joint ventures.
Each of the following activities should be covered:
a) Engineering:
with clear definition of the group leaders, consultants and subcontractors.
b) Main Supplies and Subcontract:
special attention should be given to include the group which will execute the following activities:

Procurement of long lead items


Lease or purchase of construction equipment
Supplied materials
Consumables
Inspections at the suppliers facilities
Follow up and handling
Import/export of all needed elements
Customs clearance
Transportation logistics
Material management
c) Construction
The construction organisation should define the structure - up to supervisory level - for all phases of
the project. It should identify the number of crews being planned for all the different segments of the
project (i.e. pump stations, pipeline, terminals, tank farms, SCADA etc.).
e) Project Administration and Finance
A list of the accountants, treasurers, human resources people and other related tasks required should
be detailed in this area.
f) Logistics
This area includes camps, transports, supplies, fuel distribution, warehouses and communication
systems amongst others. In many remote pipeline projects this is a very critical activity that should be
very well planned and detailed
g) Project Control
This group is in charge of the cost reports and progress payment reports. Many projects also include
progress control and planning in this group
h) Equipment administration and maintenance
The planned resources for line maintenance, repair shops, crew assistance etc. should be listed here
based on the construction equipment to be used and the weather conditions.
i ) QA/QC
A brief description of the quality assurance and control (QA/QC) programme and the resources to be
deployed should be given in the section.

j ) HSE
A brief description of the HSE program and the resources to be deployed should be given in the
section where the requirements of the environmental impact study and the environmental
management plan should be taken into account.
k) Technical Support
This is an office set up to act as an interface between the engineering group and the construction
people. It prepares work procedures to execute the activities in full compliance with the technical
requirements, the HSE and QA/QC provisions of the contract. This group of people also produces
sketches and detailed as-built surveys during construction.
l) Contract Administration
This group includes all needed resources to keep contractual communication with the clients
representatives, evaluate contract interferences, estimate scope changes
m) Communications and systems
A group of technicians to assist the systems needs of the project should be considered and detailed in
the chart.

3.2.1.4. Key Personnel


The curriculum vitae of this group of people should be part of the PEP so as to provide a detailed
qualification of the proposed leaders of the project execution.

3.2.1.5. Indicative Content of the Project Execution Plan:


3.2.1.5.1 Engineering Execution Plan

The engineering manager will define here his plans to:

Execute this task describing the subcontractors, consultants and advisors he is planning to use.
Set up the software and hardware tools needed for his group.
Identify the critical aspects and his plans to keep them under control.
Interface with other actors of the project like suppliers, owner representatives, construction people
and the community.
Control the progress made in his area including the list of data sheets, drawings and specifications.
Execute his activities under a CPM program depicting all the interfaces of his area with others.
Assist the procurement group to place supply agreements for long lead items in full alignment with the
warranty and design conditions of the contract.
Test and commission all the facilities of the installation including HAZOP activities and design
SCADA.
3.2.1.5.2 Procurement Execution Plan

The procurement manager defines here the methodology he plans to follow to supply the project with
all materials and equipment.
His plan should consider,

Procurement of long lead items (defining also the warranty period)

Lease or purchase of construction equipment


Special tools and materials
Supplied materials and spare parts
Spare parts for construction equipment
Consumables
Inspections at the suppliers facilities
Follow up and handling
Import/export of all required elements
Customs clearance
Transportation logistics
Temporary housing
Food and lodging subcontracts
Pipeyards and warehouses
Material management system definition and set up
Follow up information to be given to the client
3.2.1.5.3 Administration and Finance Plan

Here the administration and finance manager defines how he plans to keep a register of all the costs
and revenues of the project, the accounting system and the information that he will be able to
produce. In joint ventures it is very important to also define the agreement that will govern the parties.
The location of the bank accounts and advisors needed to carry out the activities in full compliance
with the local law should be detailed as well. The financing lines, the cash flow and the insurance
coverage for the project should be detailed in this paragraph. Type of guaranties to be issued for
contract purposes should also be clearly defined to avoid last-minute inconveniences.
3.2.1.5.4 Construction Execution Plan

The construction manager describes here the most important aspects of the project and the
construction techniques he is planning to put in place. A split of activities is recommended in order to
better describe each crew scope and required resources with an indication of the production expected
for each one. It is extremely important to issue a velocity chart, also called a March chart as described
in section 3.2 and in Appendix 3.2.2. This chart allows the client to better understand the position
planned for each crew at each moment with details of the expected progress. The access plans and
transportation requirements should be considered for each portion of the project. The camps strategy
and food preparation and distribution must be detailed including the subcontractors and owners
representatives needs.

For each crew, it is recommended to prepare:


List of personnel
List of equipment
Services and subcontracts needed
Scope of their work
List of challenges and plans to control them
Timing
Special methods or requirements
Procedures needed.

3.2.1.5.5 Health & Safety Plan

The health and safety manager for the project in coordination with the corporate HSE manager will
adapt the corporate health and safety plan to the project needs and will describe his execution plan to
induce all the HHRR involved in the project to a unified and leveled project plan. The target statistic
figures for the project should be established here. Special attention has to be given to the existence of
epidemics and generally to the health conditions of the site. The existence and location of first aid and
hospital facilities should be carefully planned in order to give full coverage to all the project workers
and also protect the community. It is very important to identify the number of H&S specialists that will
act on each section of the project as well as the first aid facilities. Special attention should be given to
all specific procedures needed, such as emergency evacuation, as described in the contract.
3.2.1.5.6 Environmental Impact Plan

The management plan to mitigate the environment impact of the project has to be described here by
the environment manager in coordination with the corporate HSE manager. The environment impact
study (EIS) for the project should be approved by the financial entities and/or the client before the
project site construction activities get started. These entities have to make sure that the EIS has been
duly discussed at all stages with the government and that the most important NGOs of the area have
been consulted with so that everybody knows what is being planned in order to reduce the risk of lastminute disagreements and misunderstandings, detrimental to the project. The execution plan needs
to define here all the mitigation plans to be used in the construction procedures to install the facilities
and the restoration works, indicating also which are part of the contract and those other that should be
instructed by the owner. This part of the PEP is essential in order to give clear definition of the scope
of work and the construction methods that have been planned to execute the project. All last-minute
requirements for environmental protection measures demand a lot of resources that may challenge
the smooth execution of the project if not planned in advance.
3.2.1.5.7 Project Planning and Control Plan

This is another substantial part of the PEP since it defines the way resources have been planned to
get the progress of all phases of the project needed to reach the milestone dates. The project
resourced programme should cover the entire project scope and also include sufficient detail to reflect
the PEP. It is a document that ties together all elements of the PEP and provides the key basis to
accurately evaluate the cost estimate. Additionally, all bill of quantities are shown here in order to give
a clear idea of the amount of work that has been considered for each portion of the work. This
information will be essential to provide the baseline to discuss impact of scope changes,
interferences, weather restrictions and influence along with other disruptions like stoppages or
suspensions of the project activities.
The main tools to control the project execution are the March chart and CPM resourced programmes
combined with the near-real-time project control system, as described in detail in section 13.1. This
plan has to list all the information that will be produced to track the project progress and costs to be
reported on a regular basis as required by the contract. Milestones should be defined in order to
provide a tool that will help to track completion of certain activities that otherwise could be 99%
complete and would remain there since the last 1% generally takes tremendous time and effort to get
completed. This is essential to give some warning signs to the project team. Therefore, it is extremely
important to chose project milestones that identify completion of key activities. One important element
to control progress is the weighted S curve which is developed giving the percentage participation in

the cost of the activity as estimated in the cost estimate to weight the percentage of physical
progress.
3.2.1.5.8 Risk Analysis management plan

The project team should get together to list and evaluate all project risks identified during the project
study. The entire life cycle and scope of the project including the social aspects should be analyzed to
identify the potential risks of the project. These risks have to be classified as operational, financial,
legal, contractual, climatic, community, inland security risks, etc. It is also important to identify which
are associated with internal factors which could be under the project teams control and those due to
external factors that are out of the project teams control.
A probability level has to be given to each risk and also the gravity of it occurrence should also be
valued in order to set up a matrix (probability/gravity) that will allow the project team to properly weight
the risks in order to develop a mitigation plan for each risk.
3.2.1.5.9 Quality Plan

The QA/QC manager has to develop a quality plan for the PEP, based on the corporate quality Plan
and the contractual conditions under the supervision of the corporate QA/QC manager. This plan has
to identify the practices and the sequence of activities linked to the specific quality of the project. The
plan has to define which processes are going to be controlled and also include the applicable
procedures to be used as part of the quality plan. It very important to define the content and format of
the information that will be included in the regular report to be issued by the QA/QC Manager to track
the progress of the non-compliance reports (NCR) and the actions taken to fix these NCR, which
otherwise could turn out to be an important barrier for project completion if not followed properly.
3.2.1.5.10 Community Relations Plan

Many pipeline projects face severe difficulties, delays and costs overruns due to disruptions created
by the approach taken towards the communities. Many pipeline projects are executed in remote
areas where the local people are unfamiliar with large machinery. When they are suddenly exposed to
much new equipment and people in their territory, uneasiness and opposition to the newcomers may
build up quickly. In order to prevent difficulties it is extremely important to develop a community
relations plan in coordination with the local authorities, the client and the contractor. The client
regularly takes this risky item in his hands but this plan has to be followed up and supported by the
contractors own forces.
Participation in all open meetings with the communities to explain the way the project will be executed
is essential, as is the appointment of community relations team to keep a close contact with the
local people. Both need to be clearly described in the PEP. The local regulations and common
practices followed by other projects in the area are also extremely important to define the community
relations plan. In this regard the PEP should also establish the rules for hiring local labour and the
expectations regarding the involvement of local suppliers and subcontractors.
3.2.1.5.11 Systems

The systems manager has to define the strategy to link all the project camps with the project offices
and the headquarters, including also the owners representative offices. He will also identify (in
coordination with the leaders of each project activities) the type of software that will be used for
engineering, material, procurement, accounting and control. The technical support will also be

identified in order to give a clear understanding of the systems plan that is being considered to
execute the project. It is extremely important to make sure that all systems to be used in the project
will be able to interact with systems used by the client, the suppliers, the subcontractors and the
consultants that are being part of the process. This seems to be simple but, if it is not well defined at
the beginning it could trigger a lot of delays in the project execution. Should the operational
organisation of the client (other than the construction organisation) require all the project build to be
done in a certain software that has not been used to do all the engineering, the risk of errors and loss
of information and data would be very high. Therefore, it is essential to analyze all the project scope,
the contractual requirements and the full life cycle to define systems.

Appendix 3.2.2 - A Primer to March Charts


Traditional scheduling software for the construction industry is dominated by Primavera, Microsoft
Project, Power Project and others. All of these solutions provide opportunities to develop a series of
activities that are logically connected in a sequence from project start to finish. While these tools are
very powerful, they are better designed for the construction of buildings and other facilities (power
generating stations, refineries, etc.) and are not adequate for the constructability issues and
demands of building linear project such as pipelines, rail systems or roadways. A linear project is
defined as a series of crews moving in sequence along a ROW (right-of-way) during construction.

March charts (also known as Time-Distance charts) have been widely used in linear projects,
particularly in Europe and the U.K. This methodology is newer to the Americas, but is
rapidly gaining widespread acceptance. March charts are often hand drawn, prepared in
Microsoft Excel or in a drawing program such as AutoCAD. Linear planning and scheduling
software that automates development of the plan and progressing is relatively recent
(approximately the last 15 years). Key advantages of March charts are that the schedule is
connected to the ROW geography and any constructability issues that are important to the
project. The intent of this Primer to March Charts is to provide an overview of how to
interpret and use March charts with an emphasis on using a selection of the linear planning
software tools that are currently available. A list of software is provided at the end of this
appendix.
3.2.2.1 The Basics

Differences between Gantt and March charts

Gantt charts are familiar to anyone who has planned and scheduled a project. The planner
creates a series of activities based on the project execution plan and then logically connects
these activities (Finish-Start, Start-Start, Finish-Finish and Start-Finish). Resources can be
added to each activity schedule and resource loading can be easily displayed. In order to
maintain crew sequencing in a pipeline project, the planner ensures that each activity is
connected to its successor by a Start-Start and a Finish-Finish relationship. A typical Gantt
chart for a pipeline job is shown in Fig. 1.

Fig. 1 Traditional Gantt Chart


This Gantt charts clearly shows each activity with its start and end date. Any progress is
shown on the Gantt chart as the percent completed for each task. The problem with a
traditional Gantt chart is that reporting that a bending crew is 45 % complete is quite
meaningless because these traditional tools assume that progress is from start to finish and no
connection exists between progress and the geography of the ROW. The ability to include
crew moves, permitting delays, environmental restrictions and other construction issues is
simply not possible.
A March chart on the other hand displays the same crews as a series of lines moving along
the ROW. Each crew is logically connected to its successor with Start-Start and/or FinishFinish relationships. Completed sections are easily identified with crew moves, crossings and
environmental windows visible on the March chart. Using the same example, a March chart
will clearly display which 45% of the ROW has been completed by the bending crew and
how any moves or ROW access issues have impacted the progress.
A typical March chart (Fig. 2) in its most basic form shows each crew represented by a
different line type. Usually distance along the ROW is horizontal and increases from the left
to the right. Time is typically represented vertically, increasing from bottom to top (although
it can just as easily be shown increasing top to bottom). It should be noted that the orientation
of the time and distance axes is a matter of personal preference and can easily be switched in
the software. The advantage of March charts is immediately obvious as you can determine
the location of each crew at any particular point in time. Any issues associated with crew
productivity rates are also readily apparent. For example, the red arrow in Fig. 3 indicates that
based on the productivity of each crew, the lower-in crew will overtake the ditching crew
between KP 25+000 and 30+000, which was not obvious in the Gantt chart view (Fig. 1).
Furthermore, in March charts the slope of the activity indicates the relative productivity rate
for the crew. The steeper the slope, the slower the crew is moving (because more time is
spent and less distance is completed).

Fig. 2 Simple March Chart


Non-work periods such as scheduled days off or work stoppages appear as vertical segments
on the crew line. A vertical line indicates that time is passing but the crew is not moving. Fig.
3 shows an example where the grade crew is moving slower (468 m/day) than the haul and
string crew (600m/day) with each crew working a 6 day 10h shift rotation. The green bars
across the March chart and the short vertical jumps in each crew indicate the day off each
week. This March chart shows that grading has to start 18 days ahead of hauling and
stringing in order to keep these crews from overlapping. The productivity rates that are
displayed are calculated automatically by the March chart software based on duration and
length of each task.
For clarity and ease of explanation, all of the following examples in this guide will show
only a few representative pipeline crews. Typically, each crew is assigned to a different layer
of the March chart so that the planner can display one or many crews simultaneously, by
activating the corresponding layers.

Fig. 3 Productivity Rates and Slope


3.2.2.2 Constructability Issues

With a basic understanding of these March chart elements, a March chart can be further
enhanced to display any other critical element of your project. These can include the ROW
profile, crossings, environmental restrictions and land acquisitions. Other elements such as
vegetation type, soil type and rainfall data can also be included on the March chart. The
amount and type of information shown on a March chart is determined by the project team.
ROW Profile
The ROW profile is important in developing the hydro-test plan and to determine
productivity rate changes based on elevation (discussed later in the speed profiles section).
Most profile data (LIDAR or survey) is available in a spreadsheet format and can be easily
imported into a profile diagram using the import function of the march chart software to
generate the ROW profile as seen below in Fig. 4.

Fig. 4 Elevation Profile and Restricted ROW Access

Restricted ROW access

Construction of pipelines may be hampered by periods when certain parts of the ROW are
not accessible. This would include environmental windows for wildlife and rare plants,
permitting issues or ROW acquisition delays.
Restricted access periods are easily represented graphically on March charts by rectangular
shapes as shown in Fig. 5. Once the impact of a restriction has been evaluated, it may be
necessary to modify the work plan to avoid working in restricted areas. This can be done by
splitting the crews so that work which is impacted by restricted areas will be completed at a
later date once the restriction period is over. Fig. 5 illustrates a move for both the grade and
string crew to avoid a restricted area. In this example, both crews skip the restricted area (a 1
day lag is included to allow for move) and continue to the end of the ROW at 30+000. Once
this work is finished, and the environmental restriction has expired, both crews move back to
the restricted area and complete it in a reverse lay. The red dashed lines indicate the logical
links between each crew segment.

Fig. 5 Restricted Access Showing Move Around

Crossings

Once the environmental or land restrictions have been established on a March chart, the next
step is to identify crossings. Crossing types can include foreign utilities, roads, rail or water
and are important features to locate on March chart. The method of crossing will be
dependent upon the type of crossing. Water crossings usually require an open cut (if
permissible under the environmental guidelines) or will use a HDD (Horizontal Directional
Drill). Most roads and rail crossings use some type of bore method while foreign utilities are
exposed using a hydrovac. Each type of crossing can be colour-coded on the March chart for
quick and easy identification.
Fig. 6 shows a highway (at KP 1+793) shown in grey and a blue river crossing (KP 29+690)
on the March chart.

Fig. 6 Road and River Crossings

Stockpile locations and Valve Sites

Virtually any information that is considered important can be inserted into the March chart.
The following example (Fig. 7) shows the stockpile location (KP 26+102) and the supply
zone for this pipe (KP 0+000 to KP 29+655). It is interesting to note that non-linear
structured tasks (such as mainline block valves) can also be shown on a March chart. The two
valves shown in Fig. 7 are represented by a series of rectangular shapes indicating different
stages of installation from civil to mechanical to instrumentation and telemetry. Other nonlinear features that can be added to a March chart would include hot bends (with delivery
dates) and detailed HDD activities. Pump stations can also be represented as rectangular
activities that can be progressed as well. In this regard, a March chart is able to represent both
linear and non-linear components, providing an overview of the entire project.

Fig. 7 Stockpile Sites and Valve Locations

Weather Risk

Risk related to weather events such as precipitation levels or temperature, are easily evaluated
by overlaying meteorological data on the March chart. In Fig. 8, the different shades of blue
represent average monthly rainfall amounts. The heaviest rainfalls occur in the lower right of
the March chart, represented by a darker blue. In this example, the planner has avoided
working in this area during high rainfall thus reducing the risk of heavy rain impacting
construction.

Fig. 8 March chart showing monthly average rainfall data.


3.2.2.3 Other Features

Spend Profiles and resource histograms

Spend profiles and resource histograms are simple to create once costs are added to the
labour, equipment and materials used in the March chart.
Fig. 9 illustrates an example where the weekly cost per crew and the total cumulative cost are
presented in a histogram and table. It is also possible to display the resource histogram per
week (month or day) to determine camp requirements. Spend profiles are a function of time
and are therefore displayed parallel to the time axis of the March chart. It is also possible to
create a spend profile parallel to the distance axis showing the cost per section of the pipeline.
Any changes to the March chart (such as crew moves) automatically create a change to the
spend profile.

Fig. 9 Weekly Spend Profile (per crew with weekly and cumulative totals)

Applying work and speed Profiles to crews

Most estimates, schedules and March charts assume a consistent productivity (or work) rate
for each pipeline crew along the ROW. This productivity factor is then applied for the entire
length of the spread to determine the duration of each crew. Applying a constant productivity
rate to a crew does not account for changes in profile, soil, terrain (muskeg versus mineral
soil conditions) or vegetation types. For example, a logging crew that has a productivity rate
of 2000 m/day would require 15 days to complete a 30 km ROW. While this provides a rough
estimate it doesnt account for productivity rates based on changes in vegetation types or
whether there is logging required in certain areas (for example an old burn area that does not
have salvageable timber).
The following examples shown in Fig. 10 and Fig. 11, illustrate the difference when a
vegetation classification system is used to define the productivity rates for logging and
clearing crews in a Northern pipeline spread. In this example the vegetation data and
productivity rates for both crews in a particular location were imported directly into the
March chart from an Excel data file supplied by a survey.

Fig. 10 Logging and Clearing Crews with constant productivity


In Fig. 10, we can see that both crews have very similar productivity rates with a duration of
25 and 26 days respectively for the logging and clearing crews.
The vegetation index in this example defines the amount of work (area in Ha) and work rate
for each vegetation type along the ROW. Once this data is known and available in a
spreadsheet format, it is easy to apply this index to each crew as shown in Fig. 11.
The first noticeable change is that the crews are not consistently progressing along the ROW.
Each crew line now reflects a different productivity rate with each change in vegetation type.
More importantly we can see that the duration for each crew has changed significantly.
Specifically, logging has decreased from 25 days to 16 days while the duration for clearing
has increased from 26 days to 40 days!

Fig. 11 Logging and Clearing optimized by vegetation index


This approach could easily be used in any other geographic location where a known variable
impacts on the work rate of crews along a ROW. The ability to define productivity in terms
of the ROW conditions will enable the creation of a more accurate project plan and spend
profile when compared to simply applying an uniform rate to each crew. Progress can now be
applied against the adjusted crew profiles.
Applying a speed profile to a crew, based on known changes in productivity, creates a more
accurate picture of how the crew is moving along the pipeline ROW as seen in Fig. 12.

Fig. 12 Crew Speed profile

Appendix 3.4.5 - Project Cost Estimate and


Contingency
3.4.5.1 The Development of a Project Estimate

An estimate is developed by considering the scope of a given project and estimating the
quantities of material and resources needed to successfully complete the project within a
given schedule.
Any estimate carries risk. The allocation of allowances, escalation and contingency within an
estimate and the assignment of an accuracy range to that estimate is a means by which a
bidder endeavours to identify and manage the risks associated with any estimate.

Allowances
Allowances cover incremental resources (for example, hours and money) included in
estimates to cover expected but undefined requirements for individual accounts or sub-

accounts. They cover design allowance for engineered equipment, bulk material take-off
allowance, overbuy allowances, unrecoverable shipping damage allowance, provisional
allowances for poorly defined items and freight allowance (equipment and materials). There
are two main types of allowances, assumed (based on the bidders perception of the project
requirements) and validated or historical (based on the bidders estimating database).

Escalation
Escalation is a provision in actual or estimated costs for an increase in the costs of equipment,
material, and labour from a set point in time and is due to a continuing price change over time
until the completion of the project. Escalation does not cover hyper-escalation, that is
escalation which is outside what is expected from published indices, Hyper-escalation should
be covered by contingency and allocated based on the perceived risk.

Contingency
A bidder will typically include three main types of contingency in an estimate, estimate
contingency, event contingency and management Reserve.
Estimate contingency is defined as a special monetary provision in the project budget to
cover uncertainties or unforeseeable elements of time/cost in the estimate associated with the
normal execution of a project, for example, labour rates and design development. Estimate
contingency is calculated using a risk model with input from a knowledgeable team.
Event contingency is defined as a monetary provision in the project budget to cover the costs
associated with the occurrence of one or more specific risks, for example incurring liquidated
damages or impacts from severe weather or hyper-escalation.
Management reserve is a further contingency included based on the bidders management
perception of the overall likelihood of the project cost and associated risks.
3.4.5.2 What Contingency is not meant to cover

Contingency is not meant to replace the development of an accurate estimate commensurate


with the stage of the project and the associated definition at that stage.
It is not meant to cover project scope change for example a change in pipeline throughput or
terminal storage volume.
It does not cover for design allowance which should form part of the normal project estimate
basis.
Contingency does not cover for management reserve or profit. These areas will also be
discussed.
3.4.5.3 Development of Allowances, Escalation and Contingency

Pipeline Materials
Most of the material qualities can be relatively easily quantified following the FEL process,
the number and size of valves will be set, the location and specification of pig-traps will be
defined. The associated allowances will be set based on historical data and escalation will be
set based on the appropriate published indices. These do not cover the full estimate risks. The

supply price that is the price at the time of purchase from the supplier is still likely to be
subject to change as this often cannot be fixed until some months after the bid has been made
to the developer. The risks associated with this will need to be assessed and appropriate
contingency allocated.

Other Materials
Other materials are likely to be subject to more significant quantity variations. For example,
the allowances for weight coating will cover some repair and damage and additional usage as
part of the overbuy allowance. However, contingency may also be included in the estimate to
allow for potential local rerouting which might be required to solve problem and undefined
ground issues.

Construction Labour
The construction manpower estimate has many more variables. It starts with an assessment of
the volume of work to perform, how many welds, how much ditch to dig etc.
Following assessing the volume of work the construction schedule is developed to meet the
requirements of the bid, as described in the March chart section of the The Road.
Resourcing by activity is then developed to achieve the required speed of production.
In generating the construction estimate many assumptions will have to be made for example
how easy the soil is to dig, how much of the soil can be reused in the ditch, whether the ditch
stand up without batter or stepping, and how well the ROW will stand up to multiple heavy
traffic movements. All of these will be captured in the estimate basis.
An assumption is made of construction labour productivity and equipment availability rate.
The weather in the construction season is reviewed and the impact on progress evaluated.
Many more risks are also inherent in this estimate. (A review of the risk register will
demonstrate the issues confronting the bidder.)
All elements of the buildup of the construction labour in the estimate will be reviewed and
appropriate allowances, escalation and contingency included and defined in the bidders
estimate basis. The determination of these figures can be complicated since, for example, the
productivity/quality of the construction labour will not just influence the number of hours and
therefore the number of people required to execute a project, it will also influence the loss
and damage of materials due to poor installation or handling.

General
As the various areas of the estimate are developed the variability and risk in each is different.
However the bidders estimate cannot assume that all the potential problems associated with
the construction will occur on the same job, his bid price would not be competitive. Similarly
it would be unwise to assume that no mishaps will occur either. A Monte Carlo analysis, or
similar statistical analyses, will determine the overall level of contingency that will be
required to bid a project at a level of risk that is acceptable to the bidder.
3.4.5.4 What is the Estimate Range?

The range of an estimate is defined as the difference between the lowest and highest probable
values of the estimate.

In single-point estimating, the estimator assigns a single cost value to the estimate. But
picking a single point is equivalent to stating the project WILL cost this much and clearly
does not take into account that this is an estimate with surrounding uncertainty. The single
point tends to be the most likely cost in the estimators view, the probability of achieving this
cost is not fully evaluated.
Three-point estimating allows for uncertainty around the estimated cost. To help establish the
most likely value of the estimate many approaches can be used. One such approach is a risk
based assessment using Monte Carlo techniques. It is normal to represent each area of the
estimate as a triangular distribution.

In the example above 20 individual costs could be found for the cost of a commodity.
However the estimator can idealize the cost by knowing just three points as follows
minimum

= $2,000

likely

= $5,000

maximum

= $11,000

Using a simulation and allowing the cost to vary between the high and low values in a
random way described by the shape of the triangular distribution results in a total project cost
distribution as shown in the diagram below. In this example the most likely cost (mean) or
the 50/50 estimate P50 is $74.5 million. This contrasts with the base case estimate of $70.9
which was found by adding only the most likely figures together.

The above graphic represents the output of a real estimate the distribution is slightly
squewed. For the purposes of the ongoing discussion this distribution will be represented by a
smooth normal distribution as follows.

In a normal distribution without skew the mean, median and mode are aligned and have the
same value, all equal the 50/50 or P50 probability.
A good estimate from a developers perspective should have equal probability of overrun and
under-run (i.e., a 50% probability). This is a risk neutral approach, the assumption being that
some projects will overrun while others will under-run and, in the long run, they will balance
out.
The more conservative, risk-averse attitude used by companies that need to ensure each
project returns a profit to their company (true for contracting organisations) normally
specifies a probability of 80% or higher that the project will not overrun. This is a safer route

but by specifying a high probability the required contingency (or contingency and
management reserve) will increase and with it the project cost to the developer.
This results in a sub-optimal use of funds. Large contingencies on projects in the developer
organisations project portfolio will sequester monies that could otherwise be put to
productive use (e.g., funding additional projects, beefing up R&D, investing in product
improvement, new equipment). This is a key reason why reduction of risk to the bidder by the
provision of a good FEL and by equitable allocation of risk, as discussed in The Road , is
beneficial to the developer. The excessive contingency is removed and the funds remain with
the developer for his use. Contingency added to the bid by a bidder, due to poor project scope
definition, becomes part of his bid and is lost to the developer.
Contingency is released or consumed by the project team as each of the risks is passed. It
must be noted that the contingency which is determined in the development of the estimate is
total required contingency. It does not reflect what is sometimes called "management
reserve", a discretionary amount which is added to the estimate for possible scope changes or
unknown future events which cannot be anticipated by the project team. Addition of this
reserve increases in proportion to the lack of project definition and to the history the bidder
has of the way in which the client manages change.
At the final management review of the estimate past project metrics are commonly used to
gauge the result and to provide a reality check.
Some special risks also impact the assessment of the final project contingency. These include
commercial terms of contract, for example, liquidated damages. Whilst these can play a part
in a contract with well-developed conditions and FEL they are often applied without full
consideration of the impact on schedule and, as such, when the bidder performs his risk
analysis they are found to result in significant risk and a high probability of occurrence. In
such cases the bidder adds the risk-based impact of these items to his final estimate expecting
that they will be paid in full or in part. The developer has just unwittingly increased his cost
for the project development.
3.4.5.5 Estimate Accuracy

What does a stated estimate accuracy of 15% mean?


Any discussion of accuracy must be related to a specified confidence interval.
In the next figure the median/mean/mode cost is $200 million. The 80% confidence interval
in this example (i.e., the confidence that the actual cost will fall within this range 80 times out
of 100) corresponds to costs between $170 and $230 million. The difference between $200
million and $170 or $230 million is $30 million, which is 15% of $200 million. Hence in this
example the estimate of $200 million has a + or - 15% accuracy with 80 % confidence.

3.4.5.6 How do we set Contingency?

Contingency is only meant to cover the project development as it has been described in the
scope and basis of design, which at the current state of project definition cannot be accurately
quantified, but which history and experience show will be necessary to achieve the given
project scope.
There is a tendency for those not involved or unfamiliar with estimate development to view
contingency as evidence that the estimator is inflating or "sand-bagging" the estimate to
improve the chance of bringing in a successful project i.e. one that achieves its budgetary
goals. In an effort to reduce the projected cost of a project, clients and those unfamiliar with
the process often try to limit contingency to a fixed percentage of the base estimate or in
some cases delete it entirely.
However, contingency forms an important and integral part of the estimate; it is not potential
profit and as we will discuss later should be expected to be spent in the development of the
project.

4.1 Analysis, Allocation and Mitigation of Risks


During all Phases of a Pipeline Project
After project sanction, irrespective of all the efforts to reduce challenges and risks through
the FEL phases, there will always be previously unknown challenges and risk events that
arise.
Risk events specific to pipeline construction projects retained in this section relate to events
which lead to slowdowns, hindrances and stoppages (all being called stoppages in this
document) affecting some part(s) or the whole of the construction activities.
The table in the following pages lists those residual risks events which are likely to be
encountered during the construction phase of a project.

Column 1
classifies the risks events in nine categories

Weather (Category A)
Archaeological and Man Made Artefacts (B)
Geological (C)
Flora and Fauna (D)
Social and Security (E)
Materials (F)
Engineering (G)
Permit Conditions (H)
ROW Remediation (I)

Columns 2 & 3
describe the risk event considered
Column 4
indicates at which FEL period the risk event should start to be considered
Columns 5 & 6
define who should be the risk owner
Column 7
defines the extent of the baseline reference and the extent of the risk mitigation (if any) to
include in the baseline.
Columns 8 & 9
describe the respective duties and responsibilities of the contractor and of the client for each
risk event