Why Industrial Projects Need Better Decisions Before Contract Award

by Carsten Knappe-Finger | Graduate in Business Administration (Dipl.-Betriebswirt)

The budget is often vulnerable before the project begins

When an industrial project exceeds its budget, attention usually turns to project execution. Managers examine purchasing prices, engineering hours, installation costs and schedule delays. This review is necessary, but it can begin too late. Some of the most consequential deviations have their roots in decisions made before the contract was signed. An estimate may have been calculated correctly on the basis of the information available. Yet the underlying quantities may be incomplete, the technical scope insufficiently defined or the risks inadequately translated into commercial assumptions. The resulting budget then looks precise without necessarily being reliable.

A recurring weakness in industrial machinery and plant projects is the separation of technical, commercial and delivery decisions, even though each depends on the others. The consequences often emerge only after contract award.

The conventional sequence is familiar: a technical proposal is prepared, quantities are passed to the estimating team, prices and labour rates are applied, commercial approval is obtained, and the contract is signed. Each step can be competently performed while the combined result remains fragile. The weakness may be an untested assumption between steps, rather than an obvious error within one step.

This distinction matters because the project team inherits not only a budget but also a set of promises. If the scope of installation, the level of engineering detail or the responsibility for an interface was not understood when the offer was made, execution may have little opportunity to recover the missing resources. A budget variance then appears in the project report, although its cause predates the project itself.

An early review is not an attempt to predict the future with certainty. It is a way of separating what is known from what is assumed, and of deciding consciously which uncertainties the company is prepared to accept.

Engineering determines the quantities

The starting point is technical design. Engineers define the plant configuration, equipment, interfaces and work packages. Their design assumptions determine the quantities on which cost estimating relies. The estimating function then assigns rates, prices, effort and contingencies to those quantities.

This division of labour is sensible. The problem begins when a quantity structure moves from engineering to estimating without a shared discussion of its completeness, maturity and underlying assumptions. A missing installation activity is not a calculation error in the narrow sense. Neither is an underestimated site duration necessarily a mistake in arithmetic. Both can produce a financially significant gap between the offer and the actual work.

The central management question is therefore not simply whether the calculation has been checked. It is whether the technical basis of that calculation has been understood and challenged by the people who will ultimately deliver the project.

The quantity structure is more than a list of materials. Depending on the project, it may include equipment, components, engineering deliverables, site services, installation work, commissioning activities and interfaces with other contractors. It reflects the maturity of the technical design and the division of responsibility between supplier and customer.

Engineering is responsible for defining the technical solution. The estimator cannot independently verify every design decision, nor should commercial staff invent missing technical quantities. Their task is to translate the technical basis into a cost view and to identify where the basis is insufficient for a dependable estimate. The two functions need a shared language for uncertainty.

For example, a preliminary design may indicate the principal equipment but leave site access, lifting requirements or commissioning boundaries unresolved. The estimator can price the equipment accurately and still understate the project. The right response is not to blame estimating afterwards. It is to clarify the unresolved scope, document assumptions and agree how the commercial exposure will be treated.

A useful quantity structure therefore shows not only values, but their source and maturity: which figures follow from completed design, which come from reference projects and which are provisional allowances. This makes technical uncertainty visible before it is converted into apparent financial precision.

What Intelligent Cost Management changes

Intelligent Cost Management (IKM) is a practice-based management approach developed by Carsten Knappe-Finger. It connects cost estimating, risk management and project control into a coherent decision process. Its purpose is to reduce avoidable deviations while technical and commercial commitments can still be influenced.

IKM is not a claim that all uncertainty can be eliminated. Industrial projects remain exposed to market changes, customer decisions, technical developments and unforeseen site conditions. The distinction is between unavoidable uncertainty and avoidable weaknesses in preparation. The latter deserve systematic attention.

Instead of seeing the offer calculation as a final number produced by one department, IKM treats it as a shared commitment based on technical scope, explicit assumptions, assessed risks and a credible plan for execution.

The word “intelligent” in IKM does not refer primarily to artificial intelligence or a particular software product. It describes a management discipline: information from different functions is brought together, assumptions are challenged and decisions are made with an understanding of their downstream consequences.

IKM works across three connected perspectives. Cost estimating establishes the initial economic basis. Risk management tests its vulnerability. Project control follows the remaining work and the consequences of decisions as the project develops. These perspectives should share assumptions and responsibilities rather than operate as separate reporting systems.

This changes the role of the estimator. The estimator remains accountable for the calculation, but cannot be expected to own the technical completeness of the entire project alone. Likewise, engineering cannot regard the commercial consequences of its design assumptions as someone else’s concern. Joint review is a means of preserving distinct professional responsibilities while making their interdependence explicit.

IKM also changes what “ready for approval” means. A proposal should not be judged solely by whether all cells in a cost sheet are filled. Decision-makers need to understand the maturity of the scope, material uncertainties, open actions and the degree to which execution specialists have challenged the proposed delivery assumptions.

A structured review of the quantity structure

One practical instrument within IKM is the Mengengerüst-Durchsprache (MGD), a structured cross-functional review of the quantity structure. Engineers, estimators and representatives of project execution examine the technical basis of the offer together. Sales and risk specialists can be involved where their decisions affect the scope or commercial exposure. A focused meeting of approximately two hours can be sufficient to clarify important issues when the necessary information has been prepared beforehand. The value does not lie in the duration of the meeting; it lies in bringing the relevant knowledge into one discussion before the offer becomes binding.

Participants should ask what is included, what is excluded, which quantities are estimates rather than firm values, which interfaces remain unresolved and which assumptions must be documented. Open issues need named owners and clear follow-up actions. A meeting without decisions or responsibilities is not an effective control mechanism.

The MGD is most effective when participants receive the relevant design documents, quantity lists and open-point records before the discussion. The meeting can then focus on exceptions and critical interfaces rather than on reading spreadsheets aloud. A two-hour review is a useful working discipline, not a universal guarantee; complex proposals may need more than one session.

The discussion should proceed from technical scope to execution consequences. What is the design basis? Which activities follow from it? What is provided by the customer? Where are the boundaries between suppliers? Are logistics, installation and commissioning consistent with the quantities and schedule? Which assumptions would materially change the estimate if they proved wrong?

The output is not simply a signed attendance list. It is a short record of clarified assumptions, unresolved items, their potential cost or schedule implications, responsible owners and dates for closure. Where an issue cannot be resolved before submission, the commercial decision should explicitly acknowledge it.

The principal advantage of a focused review is the simultaneous examination of technical and commercial assumptions. Questions that can pass unnoticed through sequential document reviews become visible when the responsible specialists discuss them together. The meeting format should be adapted to the complexity and risk of the proposal.

Risk management belongs inside the estimate

Risk management is sometimes conducted alongside the estimate, with a risk register that has little influence on the actual offer. That separation is dangerous. A technical assumption becomes commercially relevant when it affects quantities, engineering effort, procurement, installation or schedule.

In an integrated process, risks are discussed with the people who understand the technical and operational consequences. Their potential effects are reflected in the commercial assessment, contract strategy and subsequent project controls. A risk that cannot yet be quantified precisely should still be made visible, rather than hidden behind a single apparently exact budget figure.

FMEA and other structured risk techniques can support this work, but tools do not replace the judgement of the people responsible for design and execution.

A risk register is only useful when its contents influence a decision. If an installation duration is uncertain, for instance, the consequence may affect labour cost, subcontracting, equipment availability, liquidated damages or the proposed contractual exclusions. Merely recording “installation risk” does not establish how the offer should respond.

Technical specialists should describe the mechanism of the risk; estimators and commercial managers should evaluate the financial exposure; project representatives should assess feasibility and possible mitigation. Where appropriate, FMEA provides a structured way to examine potential failure modes, their effects and preventive measures. It is one tool within IKM, not a replacement for engineering judgement.

Not every uncertainty can be reduced to one precise number. An estimate may be more honest when it presents a range or an explicit qualification. What matters is that the decision-maker understands the relationship between technical maturity, assumed scope, contingency and contractual commitment.

Risks also have owners. A mitigation that depends on a later design review or a supplier confirmation must be assigned to a person and followed through. Otherwise, the project inherits a list of concerns without a mechanism to act on them.

From tender to execution: keep the assumptions alive

A sound offer is only the beginning. Once the project starts, the organisation must preserve the knowledge on which the budget was based. Otherwise, assumptions discussed during tender preparation disappear in the handover between sales, engineering and project management.

IKM therefore links the original estimate with ongoing cost-to-complete assessments. Project control should examine remaining work and emerging risks, not merely compare booked costs with an old budget. This creates a forward-looking view: what is still likely to happen, what can be influenced and which decisions are required now?

The feedback loop is equally important. Deviations observed in execution should inform future quantity structures, estimating assumptions and risk reviews. Without this learning, companies may repeatedly encounter the same preventable problems.

The transition from tendering to project delivery is a particularly vulnerable interface. People who prepared the estimate may not be the people responsible for executing the work. If the handover consists only of a final price and a schedule, the reasoning behind both can disappear.

A robust handover therefore includes the technical quantity structure, pricing assumptions, scope boundaries, identified risks, unresolved decisions and the commitments made during negotiations. It should also distinguish accepted risks from matters still requiring clarification. This is organisational memory in a practical form.

Once work begins, the original estimate should be compared with a current view of what remains to be done. Cost-to-complete thinking asks how many engineering hours, materials, site activities and external services are still required, and whether the associated assumptions remain valid. A favourable historic variance can be misleading if substantial unrecognised work remains.

The purpose is to create options while there is still time to act: adjust sequencing, clarify scope with the customer, change a procurement decision or escalate an emerging interface issue. Retrospective analysis remains useful for accountability and learning, but it cannot undo a commitment already made.

Finally, lessons from delivery need to return to estimating. Which quantities were routinely understated? Which interfaces generated change? Which risks were identified early but not resolved? Without a disciplined feedback loop, the same weakness may reappear in the next tender.

The organisational challenge

The hardest part of Intelligent Cost Management is rarely the spreadsheet. It is the willingness to discuss assumptions across functional boundaries before positions become fixed. Engineers must be able to question commercial simplifications; estimators must be able to challenge incomplete technical information; project managers must have a voice before delivery obligations are accepted.

IKM also connects with the POWER organisational framework—Purpose, Organisation, Wisdom, Execution and Responsibility. In industrial projects, these dimensions translate into shared objectives, effective interfaces, informed judgement, disciplined follow-through and clear ownership.

For manufacturers and plant engineering companies competing in international markets, better estimating does not begin with another decimal place. It begins with better conversations about the technical work the company is promising to deliver. The objective is not to remove every deviation. It is to prevent the ones that a better decision before contract award could have avoided.

Integrated processes often fail for ordinary organisational reasons. Functional targets reward local performance; deadlines encourage premature closure; and senior managers may prefer a single confident figure to an explanation of uncertainty. These pressures make cross-functional challenge uncomfortable precisely when it is most valuable.

Leadership can counter this by making the review of assumptions a normal part of proposal approval. Engineers should not be penalised for identifying an unresolved scope item. Estimators should not be expected to hide uncertainty in a contingency line. Project managers should be invited to challenge delivery assumptions before, not only after, the contract is signed.

POWER helps describe the organisational conditions for this work, while IKM supplies the specific practices for industrial cost decisions. Purpose aligns the project objective; Organisation connects the functions; Wisdom combines expertise and evidence; Execution closes agreed actions; Responsibility identifies who owns decisions and their consequences. The frameworks are related, but not interchangeable.

For a manufacturer considering a first step, the practical starting point is modest: select a significant proposal, identify the most consequential technical assumptions, convene a focused cross-functional review, document the decisions and carry them into the project handover. The effectiveness of the practice should then be judged by the quality of decisions and the learning it generates—not by the number of meetings held.

IKM in practice: an integrated decision chain

• Engineering design → quantities and assumptions
• Cross-functional MGD → challenge scope and interfaces
• Estimating + risk review → assess commercial exposure
• Contract decision → approve explicit commitments
• Project control → update cost to complete and act
• Learning loop → improve the next estimate

Figure 1. Conceptual IKM workflow. The arrows represent information and decision links rather than a strictly linear process.

About the author
Carsten Knappe-Finger is a Graduate in Business Administration (Dipl.-Betriebswirt) and Six Sigma Black Belt with more than 30 years of experience in international machinery and plant engineering. His leadership roles have covered commercial project management, engineering, proposal management and business excellence. He developed Intelligent Cost Management (IKM) and the POWER framework and writes about industrial decision-making, project control and productivity.