Contract Strategies for Major Projects

CHAPTER 2Data, Methods, and Nomenclature

For almost all industrial firms, the process of creating a capital project proceeds in phases, also known as stages. Owners organize the stages to facilitate decision‐making about whether to proceed. These decision points (or gates) are intended to make it easy to withdraw from an unpromising project before a great deal of money is spent. The staged process illustrated in Figure 2.1 is quite typical throughout the industrial world. We dub the stages prior to authorization front‐end loading (FEL). The process starts with the articulation of a business need for a capital project and the development of a tentative business case around that need. If the decision‐makers deem the business requirement compelling, the project passes through the first gate.

FEL‐2 focuses on the development of a project scope that achieves the business requirements in terms of product produced, quantity needed, quality of product, and so forth. Most industrial firms have their own engineering personnel do scope development without the assistance of an engineering contractor. There are exceptions, of course, and one contracting strategy that we will discuss later, functional specification contracting, leaves some or all of the scope definition up to a contractor to perform. When the scope is fully identified, the owner project team can produce a meaningful cost estimate and schedule for the project.

FIGURE 2.1 Standard stage‐gated project development process. ...