PIP White Paper

Measuring the Value

Study Team Report
Presented at the 4/7/99 PIP General Meeting

Table of Contents
1. Background

2. Objective, Approach, & Assumptions

3. Methodology

4. Where is the Value Qualitative Findings

5. Results Quantitative Findings

6. Study Team Learnings

7. Appendix A Savings Estimation Methods

8. Appendix B Savings by Task

Background
In the fourth quarter of 1998 the PIP Marketing Team commissioned a study to quantify the value
that PIP practices could potentially contribute to the process industry. A Value Added Steering
Team and Study Team were established. The teams consisted of the following members:
Team
Steering

Study

Member
Steve Franke
Chris Parker
Vernon Trevathan
Gerry Hayman
Jim Steller
Chris Morisette
Steve Boothe
Randy Foil
Larry Atkins
Bill Strejc
Brent Stewart
Bob Pearson
Steve Utz

Company
Shell Chemicals
Parsons
Solutia
Celanese
Shell Chemicals
Shell Chemicals
Parsons
CTIW
Honeywell
Tracer
Valtek
IPS
Flowserve

(Table 1)
The Steering Team met on 12/23/98 to set direction for the Study Team, and met on 3/23/99 to
review the General Meeting presentation and provide comment.
The Study Team met on:

1/18/99: to discuss/clarify the objective

2/3/99: to establish approach, assumptions, and methodology for the study
2/25/99: to review final estimates and discuss General Meeting presentation format

On 4/7/99 the Study Team delivered the Measuring the Value presentation at the PIP General
Meeting.
Objective, Approach, & Assumptions
The objective of the study was to perform an engineering-style estimate in order to quantify the
value of PIP practices.
The Study Teams approach was to:

Estimate the impact of standardization only. A conscious effort was made to filter out value
that could be derived from other sources, such as commercial terms, team building, and the
like. Additionally, no attempt was made to compare the quality of PIP standards versus the
engineering standards held by a particular owner/operator. The impact of having a single,
universally employed standard was the premise the team used.

Use a work process (before and after) structure to estimate the value. The work process
framework is a familiar approach to all the Study Team members and fit well with the use of
the selected model project used in the analysis.

Leverage the Study Team members experience from past work process improvement efforts
(with Shell Chemicals - Engineering & Construction organization).

The assumptions set by the Study Team and validated by the Steering Team were the following:

PIP practices were in a mature state, i.e. the depth and breadth of the practices were far
enough along so as to displace many of the engineering guides and standards typically
maintained by owner/operator companies and/or Engineering, Procurement, and
Construction (EPC) contractors.

Seventy percent (70%) of the process industry owner/operators and EPC contractors use the
PIP practices.

PIP practices are used without deviation.

Methodology
The methodology used by the Study Team consisted of using the work process structure (as
mentioned above) and using a detailed estimate for a model project. The model project is a real
and completed project where most of the Study Team member organizations served as
suppliers. The model project was a grassroots facility built at an existing manufacturing location.
The new facility did require tie-in to existing location systems.
The following are some vital statistics of the model project:
Item
Total Installed Cost
Stationary Equipment
Rotating Equipment
Instrument I/O
Pipe
Steel
Electrical Cable
Concrete

Quantity
$ 207 MM
140
200
1900
220,000 feet
1700 tons
500,000 feet
14,000 cubic yards
(Table 2)

Where savings were not directly estimated by the Study Team, but thought to be achievable,
extrapolations were used. A description of the extrapolation methods is made in the Results
section of this paper.
Where is the Value Qualitative Findings
Members of the Study Team identified numerous value areas. The value proposition varied from
member to member. However, from the perspective of an Engineering Contractor, a Construction
Contractor, a Vendor, and an Owner, the value was found in the following areas.
Engineering Contractor:

Less redesign and rework: common specifications mean less confusion and less chance of
error.
Less in-house training on specs: less variety of specs used by owner/operators means less
training.

More efficient vendor/constructor interface: industry wide specs will result in a more
common and consistent understanding of requirements, hence easier communication.
Spec conflicts reduced: less variety of specs should result in fewer conflicts.

Construction Contractor:

Improved constructability: a common and consistent way of building facilities should result in
constructors planning and sequencing the work better.
Reduced rework: common specifications mean less confusion and less chance of error.
Improved construction productivity: a common and consistent way of building facilities should
result in improved craftsman proficiency, hence less time executing a task.
Reduced overhead: improved craftsman proficiency should result in less training and
supervision.

Vendor:

Less inspection and testing: common and consistent requirements for fabricating equipment
should result in more vendor proficiency, hence less inspection and testing.
Inventory of materials reduced: a common, more widely applied set of specs should allow
more material commonality, hence less inventory due to reduced material variety.
Less redesign and rework: common specifications mean less confusion and less chance of
error.
More automation of fabrication: a common, more widely applied set of specs should allow for
more scale to be applied to fabrication processes, hence the opportunity to justify automation.

Owner:

Standards maintenance reduced: common industry wide specifications mean less need for
in-house specs, hence less resource for maintenance.
More efficient contractor interface: industry wide specs will result in a more common and
consistent understanding of requirements, hence easier communication.
Spec conflicts reduced: less variety of specs should result in fewer conflicts.

Results Quantitative Findings

The primary deliverable from this study was an estimate of the potential savings from PIP
adoption. Using the model project the savings are as follows:

Cost Category
Major Equipment
Construction
Materials
Engineering
Owner
Taxes
Total

Baseline Cost ($MM)

33.2
81.5
35.2
29.1
22.3
5.8
206.7

Savings ($MM)
2.2
7.1
2.6
1.2
0.4
0.4
13.9

Savings (% of Cost)
6.6
8.7
7.4
4.1
1.8
6.9
6.7

(Table 3)
Direct estimates made for the value study comprise $ 9.9 MM of the $ 13.9 MM reported, or 71%
of the savings amount. The direct estimates made by the Study Team members are located in
the following cost categories:

Flowserve (Pumps) Major Equipment

Honeywell (DCS and Field Instrumentation Engineering & Construction) Construction
Tracer (Heat Tracing Engineering & Construction) Construction
CTIW (Steel Fabrication) Materials
IPS (Piping Fabrication) Materials
Valtek (Control Valves) Materials
Parsons (General Engineering) Engineering
Parsons (General Construction) - Construction
Shells (Owner Costs for QA/QC, etc.) Owner

As was mentioned previously certain select cost sub-categories were estimated for savings via
extrapolation. Extrapolation comprised $ 4.0 MM of the $ 13.9 MM reported, or 29% of the
savings amount. Cost sub-categories were selected for extrapolation if a reasonable inference
could be made that savings would be realized basis what the Study Team discovered making the
direct estimates. For example, the Team concluded that savings in vessel and column fabrication
would be realized basis what was discovered doing the pipe estimate, i.e. less rework and
redesign, less inspection and testing, etc.
However, it was recognized that extrapolated savings estimates have a degree of uncertainty.
Therefore, percentages used in the extrapolations were adjusted appropriately.
The following are the cost sub-categories selected for extrapolation and the corresponding
extrapolation method used to project the savings amount:

Major Equipment
Columns (Average of IPS and Flowserve savings percentage)
Vessels (same as above)
Exchangers (same as above)
Furnaces (same as above)
Tanks (same as above)
Misc. Equipment (same as above)
Pumps Other (Flowserve savings percentage)
Compressors (Combination of Flowserve savings percentage and other Shell Chemical
Engineering & Construction internal experience)

Construction
Subcontract Structural Steel (Parsons construction labor savings percentage)
Subcontract Electrical Other (same as above)
Subcontract Piping (same as above)
Subcontract Insulation (same as above)

Materials
Instruments (Honeywell materials savings percentage)
Piping Other (IPS savings percentage)
Electrical (IPS savings percentage divided by 2)
Insulation (IPS savings percentage divided by 2)

Engineering Other (Parsons General Engineering savings percentage)

IPS estimates had the highest commonality to Columns, Vessels, Exchangers, Furnaces, Tanks,
and Misc. Equipment (e.g. skid units) due to the nature of the disciplines. An average with the
Flowserve savings percentage was done so as to lower the percentage applied to these major
pieces of equipment, thus making the estimate conservative. It was assumed that the full
Flowserve savings percentage would be realized for non-Flowserve supplied pumps.

The subcontracts for steel, piping, electrical, and insulation were predominately labor; a direct
application of Parsons construction labor savings appeared reasonable.
Instrument materials were directly correlated to the materials savings estimated by Honeywell for
their portion of the project, hence a direct application of the Honeywell materials savings
percentage was made. Other piping materials were estimated using the full IPS savings
percentage.
A reduced IPS savings percentage was applied to electrical and insulation materials. Again, the
percentage was reduced to make the estimate conservative.
And, other engineering was estimated using the full Parsons general engineering savings
percentage due to the similar nature of work.
Where cost sub-categories could not be reasonably extrapolated they were left as is; i.e. no
savings were projected.
Appendix A provides a total list of cost sub-categories that underlie Table 3. The estimation
method used to determine savings for each sub-category is also listed.
Appendix B provides an alternative presentation of the directly estimated savings ($ 9.9 MM).
Here savings are listed by task. Please note that an individual Study Team members total direct
estimate spans more than one task category.
It should be noted that the staff time used to produce the above estimate was 300 man-hours, a
significant amount of resource invested. This time does not include meeting time, travel, etc., just
the direct time spent producing the estimate.
Study Team Learnings
As the Study Team progressed toward the objective some lessons were learned:

PIP practice deviation by owners and EPC contractors was identified as a concern. The
value estimated by this study could easily disappear if consistent application of the practices
does not occur.

Maturation of the PIP practices, both in content and scope, will need to happen and will be a
key towards realizing the value.

Usage of the practices needs to be widespread through out the industry in order for vendors,
owners, and EPCs to realize economies of scale.

The Study Team findings of 6.7% of TIC savings validated previous efforts to estimate the
value of PIP practices.

In conclusion, the Study Team believes the savings are real and significant, provided a sound
roadmap for development, implementation, and adoption of PIP practices is followed.

Appendix A Savings Estimation Methods

Listed below are all of the model project cost sub-categories and the estimation method
employed to determine savings.
Cost Category
Major Equipment

Construction
(Note all Labor sub-categories and
the Field Indirect sub-category were
estimated by Parsons)

Materials

Engineering

Sub-Category
Columns
Vessels
Exchangers & A/C
Pumps Flowserve
Pumps Other
Compressors
Furnaces
Tanks
Misc. Equipment
Labor Install Equipment
Labor Concrete/Earth
Labor Piling
Labor Structural
Labor Piping
Labor Instruments
Labor Electrical
Labor Insulation
Labor Painting
Labor Buildings
Subcontract Install Equip.
Subcontract Concrete/Earth
Subcontract Piling
Subcontract Structural
Subcontract Piping
Subcontract Instruments
Honeywell
Subcontract Electrical
Tracer
Subcontract Electrical
Other
Subcontract Insulation
Subcontract Painting
Subcontract Buildings
Field Indirects
Install Equipment
Concrete/Earth
Piling
Structural CTIW
Piping IPS
Piping Valtek
Piping Other
Instruments
Electrical
Insulation
Painting
Buildings
General - Parsons
Other

Savings Estimation Method

Extrapolation
Extrapolation
Extrapolation
Direct Estimate
Extrapolation
Extrapolation
Extrapolation
Extrapolation
Extrapolation
Direct Estimate
Direct Estimate
Direct Estimate
Direct Estimate
Direct Estimate
Direct Estimate
Direct Estimate
Direct Estimate
Direct Estimate
Direct Estimate
As Is No Savings Projected
As Is No Savings Projected
As Is No Savings Projected
Extrapolation
Extrapolation
Direct Estimate
Direct Estimate
Extrapolation
Extrapolation
As Is No Savings Projected
As Is No Savings Projected
Direct Estimate
As Is No Savings Projected
As Is No Savings Projected
As Is No Savings Projected
Direct Estimate
Direct Estimate
Direct Estimate
Extrapolation
Extrapolation
Extrapolation
Extrapolation
As Is No Savings Projected
As Is No Savings Projected
Direct Estimate
Extrapolation

Owner
Tax

Shell Chemicals
( none )

Direct Estimate
Extrapolation

Appendix B Savings by Task

Listed below are the directly estimated savings ($ 9.9 MM) by task.
Task Category
Engineering & Design

Construction & Project

Management

Fabrication

Owner

Total

Task
Less Re-Design & Rework
Less Spec Training
More Efficient
Vendor/Constructor
Interface
Reduced Spec Conflicts
More Design Automation
Improved Constructability
Reduced Rework
Improved Productivity
Reduced Overhead
Less Inspection & Testing
Reduced Materials
Inventory
Less Re-Design & Rework
Reduced Overhead
More Fabrication
Automation & Efficiency
Standards Maintenance
Reduced
More Efficient Contractor
Interface
Reduced Spec Conflicts

Savings ( $ M )
672.2
393.7
911.3

Savings ( % of Total )
7
4
9

413.1
172.0
1,960.1
618.6
728.3
1,142.2
201.3
1,794.9

4
2
20
6
7
12
2
18

44.0
227.6
227.8

<1
2
2

35.0

<1

200.0

126.0
9,868.1

Notes:
1. An individual Study Team members total direct estimate spans more than one task category.