Engineering Project Appraisal E-Book

Martin Rogers

• Herausgeber: John Wiley & Sons
• Kategorie: Wissenschaft und neue Technologien
• Sprache: Englisch

Seitenzahl: 588

Veröffentlichungsjahr: 2012

Beschreibung

In most cases of civil engineering development, a range of alternative schemes meeting  project goals are feasible, so some form of evaluation must be carried out to select the most appropriate to take forward. Evaluation criteria usually include the economic, environmental and social contexts of a project as well as the engineering challenges, so engineers must be familiar with the processes and tools used.

The second edition of Engineering Project Appraisal equips students with the understanding and analytical tools to carry out effective appraisals of alternative development schemes, using both economic and non-economic criteria. The building blocks of economic appraisal are covered early, leading to techniques such as net present worth, internal rate of return and annual worth. Cost Benefit Analysis is dealt with in detail, together with related methods such as Cost Effectiveness and the Goal Achievement Matrix. The text also details three multi-criteria models which have proved useful in the evaluation of proposals in the transportation, solid waste, energy and water resources fields: the Simple Additive Weighting (SAW) Model, the Analytic Hierarchy Process (AHP) technique and Concordance Analysis. There is a full discussion dealing with risk and uncertainty in these models.  

With many worked examples and case studies, Engineering Project Appraisal is an essential text for both undergraduate and postgraduate students on professional civil engineering courses, and it is expected that students on planning and construction management courses will find it a valuable addition to their reading.

Leseprobe

Contents

Preface

Introduction

Project appraisal

Planning and decision making as primary functions of management

A brief history of project appraisal

Summary

PART 1 ECONOMICS-BASED PROJECT APPRAISAL TECHNIQUES

Chapter 1 Decision Making and Project Appraisal

1.1 Decision making context

1.2 Techniques for decision making

1.3 Primacy of the rational model

1.4 Decision-making conditions

1.5 Project planning process

1.6 Example of a decision process

1.7 Summary

1.8 Review of succeeding chapters

Chapter 2 Basic Tools for Economic Appraisal

2.1 Introduction

2.2 The time value of money

2.3 The estimation of interest

2.4 Simple and compound interest

2.5 Nominal and effective interest rates

2.6 Continuous compounding

2.7 Time equivalence

2.8 Economic computation

2.9 Summary

Chapter 3 Present Worth Evaluation

3.1 Introduction

3.2 Present worth – the comparison process

3.3 Summary

Chapter 4 Equivalent Annual Worth Computations

4.1 Introduction

4.2 The pattern of capital recovery

4.3 Modifying annual payments to include salvage value

4.4 Evaluating a single project

4.5 The comparison process

4.6 Summary

Chapter 5 Rate of Return Computation

5.1 Introduction

5.2 Minimum Acceptable Rate of Return (MARR)

5.3 Internal Rate of Return (IRR)

5.4 IRR for a single project

5.5 Incremental analysis

5.6 Summary

Chapter 6 Benefit/Cost Ratio, Depreciation and Taxation

6.1 Introduction

6.2 Costs, benefits and disbenefits

6.3 Estimating the benefit/cost ratio for a single project

6.4 Comparing mutually exclusive options using incremental benefit/cost ratios

6.5 Depreciation

5.6 Taxation

6.7 Summary

Chapter 7 Cost–Benefit Analysis of Public Projects

7.1 Introduction

7.2 Historical background to cost–benefit analysis

7.3 Theoretical basis for cost–benefit analysis

7.4 The procedure of cost–benefit analysis

7.5 Identifying the main project options

7.6 Identifying costs and benefits

7.7 Placing valuations on all costs and benefits/disbenefits

7.8 Assessing and comparing the cost–benefit performance of options

7.9 Sensitivity analysis

7.10 Final decision

7.11 Case study: the cost–benefit analysis of a highway improvement project

7.12 Case study: water supply scheme in a developing country

7.13 Case study: cost–benefit analysis of sewer flooding alleviation

7.14 Advantages and disadvantages of traditional cost–benefit analysis

7.15 Techniques for valuing non-economic impacts

7.16 Using cost–benefit analysis within different areas of engineering

7.17 Summary

Chapter 8 Economic Analysis of Renewable Energy Supply and Energy Efficient Projects

8.1 Introduction

8.2 Policy context

8.3 Renewable energy supply and energy efficient technologies

8.4 Economic measures for renewable energy and energy efficient projects

8.5 Estimating GHG emissions

8.6 Uncertainty

8.7 Case studies

Chapter 9 Value for Money in Construction

9.1 Definition of Value for Money

9.2 Defining Value for Money in the context of a construction project

9.3 Achieving Value for Money during construction

9.4 Whole-life costing

9.5 The concept of ‘milestones’

9.6 Detailed description of the Value for Money framework

9.7 Value for Money and design

9.8 Is there a conflict between Sustainability and Value for Money

9.9 The role of better managed construction in delivering projects on time and within budget

Chapter 10 Other Economic Analysis Techniques

10.1 Introduction

10.2 Cost effectiveness

10.3 The Planned Balance Sheet

10.4 Hill’s Goal Achievement Matrix

10.5 Summary

PART 2 NON-ECONOMIC-BASED PROJECT APPRAISAL TECHNIQUES

Chapter 11 Multicriteria Analysis

11.1 Introduction

11.2 Multicriteria evaluation models

11.3 Simple non-compensatory methods

11.4 Summary

Chapter 12 The Simple Additive Model

12.1 Background

12.2 Introduction to the Simple Additive Weighting (SAW) Method

12.3 Sensitivity testing

12.4 Probabilistic Additive Weighting

12.5 Assigning weights to the decision criteria

12.6 Checklists

12.7 Case Study: Using the Simple Additive Weighting Model to choose the best transport strategy for a major urban centre

12.8 Summary

Chapter 13 Analytic Hierarchy Process (AHP)

13.1 Introduction

13.2 Hierarchies

13.3 Establishing priorities within hierarchies

13.4 Establishing and calculating priorities

13.5 Relationship between AHP and the Simple Additive Weighting (SAW) model

13.6 Summary

Chapter 14 Concordance Techniques

14.1 Introduction

14.2 Concordance Analysis

14.3 PROMETHEE I and II

14.4 ELECTRE I

14.5 Other Concordance Models

14.6 Summary

Chapter 15 Concluding Comments

15.1 Introduction

15.2 Which project appraisal technique should one use?

15.3 Future challenges

Interest Factor Tables

Index

This edition first published 2012©2012 John Wiley & Sons, Ltd.

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Library of Congress Cataloging-in-Publication Data

Rogers, Martin (Martin Gerard) Engineering project appraisal : the evaluation of alternative development schemes / Martin Rogers, Aidan Duffy. p. cm. Includes bibliographical references and index.

ISBN 978-0-470-67299-0 (pbk. : alk. paper)

1. Engineering–Costs. 2. Engineering–Management. I. Duffy, Aidan. II. Title. TA183.R55 2012 658.4′04–dc23

2012003455

A catalogue record for this book is available from the British Library.

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books.

Cover design by Sandra HeathCover image courtesy of Shutterstock

Preface

Practising engineers nowadays require a broad range of skills. They must be aware of and understand the economic, environmental and social contexts within which a development project takes place, and be able to resolve problems that arise in these areas. Accredited professional engineering courses now require students to develop an awareness of the economic, financial, social and environmental factors of ­significance to development projects, along with an understanding of risk analysis and quality systems. To achieve this level of understanding, engineering project appraisal must form a core subject area within any course wishing to fulfil this educational objective. The advent of programmes such as the public–private partnership schemes requires professional engineers to be aware of a much broader range of issues related to the proposed scheme than merely the technical aspects of its design and construction. The overall implications associated with each project option must also be considered at the planning stage as part of the engineer’s input to the project.

This textbook provides an introduction to the full breadth of evaluation techniques required for the assessment of competing engineering projects. The book is divided into two parts. An introduction to the topic of engineering project appraisal is given in Chapter 1. The remainder of Part I, spanning Chapters 2 to 10 of the book, initially covers the basic building blocks of economic appraisal, such as the time value of money, interest rates and time equivalence. It then proceeds to explain basic ­economic techniques, such as net present worth, internal rate of return and annual worth. The main application of these techniques to public project appraisal – Cost–Benefit Analysis (CBA) – is dealt with in detail, together with a number of related decision methods, such as Cost Effectiveness and Goal Achievement Matrix, all of which are derived from CBA but where the common aim is increased inclusiveness. Depreciation and taxation are also addressed. Value for money in construction projects and the economic analysis of renewable energy supply and energy efficient projects are also dealt with at the conclusion to the first part of the text.

The second part of the book, spanning Chapters 11 to 15, examines the appraisal techniques that are appropriate when factors other than purely economic ones require consideration. The text details three multicriteria models that are widely used in the planning and evaluation of engineering projects: the Simple Additive Weighting (SAW) Model, the Analytic Hierarchy Process (AHP) technique and Concordance Analysis. The procedures used by these models to deal with both risk and uncertainty are explained within the text. Previously, many textbooks in the area have made only brief reference to such models. In recent times, however, they have proved ­particularly useful in the evaluation of competing proposals in the transport, solid waste and water resources areas. The space given to them within this book reflects their ­growing importance as tools of engineering evaluation.

The economic and multicriteria methods should not be viewed as totally separate. Often, an initial economic evaluation undertaken for a set of competing project options can subsequently be assimilated into a wider evaluation where the economic scores constitute one criterion, viewed alongside other technical, environmental and social criteria within a multicriteria framework.

In an effort to make the book as useful as possible to both students and practising engineers, case studies and worked examples for the various economic and multicriteria techniques are given throughout the text. Within this second edition, additional worked examples are included within Chapters 2 and 3, with Chapter 7 containing two additional case studies, one from the water supply area and one from the sewer flooding alleviation area, to add to the existing case study from the highways area originally included within the first edition. Chapters 8 and 9, addressing value for money in the economic analysis of renewable energy ­supply, energy efficient ­projects and construction projects, respectively, are new chapters within the text, reflecting the growing importance of these topics within the planning, design and construction of engineering projects.

The book is seen as an essential text for both undergraduate and postgraduate ­students within professional engineering courses. It is also envisaged that students on planning and construction management courses will find the text useful.

Martin Rogers and Aidan DuffyDublin Institute of Technology

Introduction

Project appraisal

Project appraisal is a process of exploration, review and evaluation taken on by the decision maker as the alternative options for development are defined within the project planning process. It can also be expressed in terms of a number of ­mathematical techniques that simplify the comparison of project options on the basis of an agreed criterion or set of criteria. These techniques provide a rational and significant approach to evaluating diverse aspects of different alternatives and the ability of these alternatives to achieve a set objective. These aspects can be purely economic or can be more broadly set to encompass technical, environmental and social concerns as well. The primary objective is to aid in the process of making informed and rational choices regarding the most effective use of available scarce resources. In the context of the planning of engineering projects, it is concerned with establishing the ­priorities between competing project options by judging the real cost to society of resources. Its purpose is to judge the merits of each alternative based on a set of concerns that can be economic, technical, social or environmental (or any combination of these), depending on the nature of the evaluation.

Who are the decision makers? In the past, the decision whether to employ resources for one purpose rather than another lay with administrators, planners and financiers rather than engineers, who tended to concentrate their efforts on the design/construction aspects of the project in question. Nowadays, however, with engineers taking their place within project companies involved with the planning and financing of development projects, they are required to have a much broader range of skills. They are required both to be aware of and to understand the economic, environmental and social contexts within which a development project takes place, and to be able to resolve problems that arise in these areas.

Decisions within project appraisal have their basis in a number of fundamental concepts. They should be made among alternative courses of action, each of which is clearly and unambiguously defined. The decision itself should be based on the expected future outcomes arising from the various project options. It is desirable to have at least one if not several criteria of evaluation. These will allow judgements to be made between project options based on their relative intrinsic worth. Only ­criteria that demonstrate differences between the various options are of relevance to the decision maker. Any criterion where the options perform identically will not form the basis for making an informed choice.

Ultimately, it is the people involved who make the decisions. The techniques ­outlined within this text are only tools to assist in the moving forward from this process. The outputs that result from these techniques are valid only for the individual or group of individuals who chose the model in question for the particular purpose of interest to them. A different group may have selected a different type of model or may indeed take the same results and interpret them in a different manner. The final decision must only be arrived at after appropriate consultations have taken place between all actors involved in making the decision, with the output from the project appraisal technique helping to make sense of the information at their disposal.

Students of engineering must develop an awareness of the relevant economic, financial, social and political factors of significance to engineering development ­projects, along with an understanding of risk analysis and quality systems. This knowledge is a vital building block in an engineering student’s education, given that the ability to analyse and solve engineering problems must include a capacity to make choices on the basis of environmental/commercial as well as engineering/technical constraints. The ultimate objective of project appraisal is to secure the greatest benefit from the available scarce resources.

Planning and decision making as primary functions of management

Management can be defined in terms of its four primary functions. It is the process of planning and decision making, organising, leading and controlling an ­organisation’s human, financial, physical and information resources to achieve organisational goals in an efficient and effective manner. During the planning phase of a development project, its form and design are finalised. The subsequent construction/implementation phase requires the organisation of human and other resources required to ­complete it. Appropriate leadership ensures that available resources are used to their utmost potential in delivering the finished product in the most efficient and effective manner. Finally, control mechanisms must be put in place throughout all phases of the project’s development to monitor actual progress against that which was ­originally planned and expected. This process highlights those areas where corrective action needs to be taken in order that the project can be completed in a form as close as ­possible to that envisaged in the original plan. It helps ensure the effectiveness and efficiency needed for the successful completion of the project in the form originally planned.

Planning is the first and most important function of management. All other ­functions flow directly on from it. In the context of the management of engineering projects, planning involves the determination of the type of scheme that will best meet the goals and objectives of the organisation in question. Decision making, as a core element of the planning process, involves selecting a course of action from a set of alternative schemes. It is thus the point within the engineering management process at which engineering project appraisal takes place. Decision making and planning are codependent – a plan cannot exist until a decision is made to commit resources to it.

The process of engineering management is action-orientated, with decision making at its centre. Use of project appraisal techniques will guide the manager in the making of these decisions. To set the context within which project appraisal takes place, the identity of the decision maker, the most appropriate type of decision making for the process in question and the environment of certainty/uncertainty/risk within which the decision is made, must all be determined. These topics are dealt with in detail in Chapter 1.

In reality, however, the behaviour of engineering managers is not adequately described by the four ‘functions’ of management referred to above. With respect to engineering decision making in particular, it is, in fact, a diverse and project-specific process. To be effective, it must take place within the context of almost continuous communication with relevant interested parties both within and outside the organisation. Engineers must, therefore, be able to communicate effectively, convincing their fellow workers that the selected course of action is the most appropriate one, resolving any conflicts that might arise and, if necessary, using their intuition.

A brief history of project appraisal

Engineering project appraisal has emerged from two completely separate streams of work. The economics-based methods addressed in Part 1 of this book are closely aligned with conventional microeconomics, where the economic behaviour of very small segments of the economy, such as individual firms or public/private organisations, are scrutinised. Engineering economics focuses on economic ­decision making within such individual organisational units. Interest in economics among engineers arose both from the obvious applicability of the laws of ­economics to the production and use of scarce resources and the desire on their part to make informed financial analyses of the effects of the implementation of projects they had developed and designed. The Economic Theory of the Location of Railways by Wellington (1887) was one of the earliest books on engineering economy. Written in the United States at a time when railway construction was of overriding importance to the eco­nomy, it was born out of the belief that engineers, when deciding on prospective locations for railway lines, paid scant regard to the costs and ­revenues the line would generate over its life-span. Wellington deduced that ­capitalised costs should be considered as a basis for selecting preferred lengths of rail lines or their curvature. By bringing this problem to light, Wellington captured the basic thrust of engineering economics. He believed that good engineering ­management required that those making strategic or tactical decisions should be aware of the economic consequences of their choices.

A second significant author within classical engineering economics was Eugene L. Grant, who, in his text Principles of Engineering Economy (Grant, 1930), ­discussed the importance of using compound interest calculations as a basis for ­comparing long-term investments in capital goods alongside the need for evaluating short-term investments. Riggs et al. (1996) emphasised the importance of ­engineering economics in the phrase ‘those that manage money manage all’.

The second strand of thought from which engineering project appraisal has emerged, and one which is dealt with in Part 2 of the book, involves the examination of multicriteria-based methods of project analysis that go beyond the evaluation solely of the proposal’s economic consequences. This class of decision methods was devised in order to allow the appraisal of projects in situations where other non-economic consequences needed to be introduced into the analysis. These have proved particularly appropriate in the civil engineering field, where complex development projects involving attributes that are diverse in nature and are often difficult to ­measure quantitatively let alone in monetary units are required to be evaluated. Work on these methods has proceeded on both sides of the Atlantic. In the United States, Keeney & Raiffa’s Decisions with Multiple Objectives (Keeney & Raiffa, 1976) and Saaty’s The Analytic Hierarchy Process (Saaty, 1980) introduced the theoretical basis for two multicriteria techniques that have been widely applied to engineering option choice problems. In Europe, Roy’s ELECTRE Model (Roy, 1968) has been used over the past 30 years to solve decision problems in the transport, environmental and water engineering fields. In general, multicriteria decision methods offer a level of flexibility and inclusiveness that purely economics-based models tend to lack. On the downside, with some of the more complex multicriteria models, however, the numerical computation involved can be quite complex, unwieldy and inaccessible.

Summary

A practitioner within the field of engineering project appraisal will draw upon his or her combined knowledge of both engineering and decision modelling and will pick the appraisal tool, be it a purely economics-based or a multicriteria model, which he or she feels will be best suited to the problem under scrutiny and will most easily identify the correct course of action. There is still some debate among practitioners in the field regarding the theoretical basis for some of the methods referred to in this text. However, all the major evaluation methods outlined have shown themselves to be readily ­applicable to problems of option choice for engineering development projects. Such is the variety of methods open to the practitioner that the problem often lies in identifying from the wide variety of available methods that method which is most appropriate to the problem in hand. It is hoped that this text will go some way to guiding potential users of the models towards choosing the particular appraisal methodology which best suits their needs in terms of the quality and type of data available to be input into the model, the level of detail required in the final results output from it, and the time and resources at the decision maker’s disposal for completing the decision process.

This book concerns itself with project appraisal in the broadest context. The assessments detailed here concentrate on the effect an engineering development has on society as a whole rather than on the project promoters themselves. Major ­engineering development projects, even if partially or wholly funded by private ­sector capital, must be assessed in terms of their effect on all those who come within its influence.

The aim of this book is to give civil engineers a basic technical knowledge of ­project appraisal, providing them with a platform which will allow them to participate as informed professionals within the planning process for any major infrastructure project. While the book concentrates on providing technical information on the appraisal techniques, it must be realised that the use of these in isolation will never achieve the results desired. All students of project appraisal must realise the ­importance of the political dimension inherent in such a selection process. Politics intrudes at every step in the decision process and at every level in the decision ­hierarchy. The politics of engineering project planning must be recognised and ­managed effectively. A more detailed discussion of the political decision-making process is given in Chapter 1.

This is not a comprehensive or advanced text on engineering project appraisal. The book cannot, through limitations on space, deal with all the complexities of the ­individual appraisal techniques detailed within the book. It is, nonetheless, hoped that it gives the reader a sufficiently broad knowledge of the range of assessment methods available to practitioners in the area, and will enable them to delve deeper if necessary into the technical complexities of any of the models outlined in the text and to participate fully, with professionals from other disciplines if necessary, in the ­planning and selection process for major infrastructure projects.

References

Grant, E.L. (1930) Principles of Engineering Economy. The Ronald Press, New York.

Keeney, R.L. & Raiffa, H. (1976) Decisions with Multiple Objectives. John Wiley & Sons, Inc., New York.

Riggs, J.L., Bedworth, D.D. & Randhawa, S.U. (1996) Engineering Economics. McGraw Hill, New York.

Roy, B. (1968) Classement et choix en présence de points de vue multiples (la méthode ELECTRE). Revue Informatique et Recherche Operationnelle, 2e Année, 8, 57–75.

Saaty, T.L. (1980) The Analytic Hierarchy Process. McGraw-Hill, New York.

Wellington, A.M. (1887) The Economic Theory of the Location of Railways. John Wiley and Sons, Inc., New York.

PART 1

ECONOMICS-BASED PROJECT APPRAISAL TECHNIQUES

Chapter 1

Decision Making and Project Appraisal

1.1 Decision making context

Let us firstly discuss the identity of the decision maker. In answer to the question as to whether individuals or organisations make decisions, it is a widely held view that managerial decision making is essentially an individual process, but one which takes place within an organisational context. Therefore, while the decision maker is central to the process, any given decision made may influence other individuals and groups both within and outside the organisation, as well as having the potential to influence the surrounding economic, social and technical environment within which they all operate.

In the particular context of engineering project appraisal, complex decisions may need to be resolved involving not only the definition and evaluation of alternative actions, but also the resolution of how the chosen project should be physically undertaken. Such complex decisions, often involving the expenditure of vast amounts of money, are rarely taken by one single individual decision maker, such as a government minister, a technical expert or an administrator. Even if the final legal responsibility does lie with one specific individual, the decision will only be taken after consultation between this designated individual and other interested parties. For example, the final decision regarding whether a major highway project will proceed is the responsibility of the relevant government minister. However, his or her decision is made only after a consultation process with interested parties has been completed, usually by means of a formal public inquiry at which all affected parties are represented. Such a decision could in some cases be the ultimate responsibility of a collection of individual decision makers, such as a cabinet of government ministers or an elected or appointed body. Groups seeking to directly influence the decision maker, such as professional representative institutions or local community groups, could be directly affected by the decision. All these ‘actors’ are what Banville et al. (1993) call primary stakeholders in the decision process. They have a pre-eminent interest in the outcome of the process and will intercede to directly influence it. Also, there are third parties to the decision, such as environmental and economic pressure groups that are affected only in general terms by the decision. Termed secondary stakeholders, they do not actively participate in making the decision. Their preferences, however, must be considered.

In such complex cases, it is usual for one of the primary stakeholders central to the decision process to be identified and designated as the decision maker. In the context of the appraisal, therefore, the decision is, in effect, reduced to an individual process. The diverse backgrounds and differing perspectives of the various stakeholders may mean that not all can benefit directly from the decision-making procedure. This chosen stakeholder, as the designated decision maker, then plays a critical part in the process. In some circumstances, however, he or she may only be a spokesperson for all the stakeholders, both primary and secondary. Whatever the relative influence of the various actors, the process requires that a decision maker be identified, even if the objectives specified by the chosen party are those commonly held or assumed to be commonly held by the entire group of stakeholders.

Although the actual process of decision making is generally carried out by the designated decision maker, in certain complex and/or problematic situations it is more usual for it to be undertaken by a separate party who is expert in the field of decision theory. This person, called the facilitator or the analyst, can work alone or as leader of a team. The function of the analyst is to explain the mechanics of the decision process to the decision maker, obtain all required input information and interpret the results, possibly with the use of decision models, in an easily understandable way.

For the purposes of this book, it will be assumed that the decision maker is an individual, responsible for each step in the decision process, with the ability to directly influence the decision-making procedure.

1.2 Techniques for decision making

A decision is only needed when there is a choice between different options. Such a choice can be made using either a non-analytic or an analytic technique. The first type is used for less important, relatively trivial decisions. The second type is required for more complex decisions involving the irreversible allocation of significant resources. These techniques justify greater input in terms of time and expense on the part of the decision maker.

1.2.1Non-analytical decision making

Some decisions are made without conscious consideration, on the basis that they are perceived by the decision maker as being ‘right’. These are intuitive in nature and reflect an ingrained belief held by the decision maker in relation to the situation under examination. There is, however, the danger that the decision environment may have changed and that new conditions could now prevail, resulting in the decision maker’s intuition being misplaced and incorrect. For this reason, decisions based on intuition should only be used with extreme care, in matters where the outcome is of small consequence.

The other type of decision in this category – judgemental decisions – are more ‘rational’ or reasoned in their approach than the first type. They are appropriate only for those decisions that recur. The decision maker consciously reasons out the probable outcomes of the possible alternatives using his or her judgement, which has been developed from past experience and general knowledge. He or she selects the alternative that he or she believes will deliver the most desirable outcome. For a large organisation where the same types of decision tend to recur very frequently, these types of decision can be very useful. The similarity between these frequently occurring decision situations allows the effective use of ‘programmed’ decisions where, like a computer-based algorithm, the selection of options is highly structured and consists of an ordered sequence of clearly defined steps. An example of such a programmed decision is the use of a code of practice by a structural engineer to design a reinforced concrete building. Because the set of design decisions is standard for such a process, the code of practice provides a guide for the designer regarding the major decisions that should be made and the sequence in which they should be addressed. Professional judgement alone is inadequate for this decision process, as such a problem can be very complicated. Because the code of practice is used successfully by structural engineers on a daily basis to design reinforced concrete structures, they have the confidence that using this ‘programme’ as a framework for their design decision will result in a properly designed building. Such codes of practice are not static, unchanging documents, but are amended as technological advances dictate. In general terms, within this type of decision, the ‘programme’ must be altered to take account of situational changes, be they alterations in the economic, social or technological environment.

It is important, therefore, to distinguish between a programmed decision and a non-programmed decision. As previously defined, a programmed decision is applied to structured or routine problems, involving repetitive work and relying primarily on previously established criteria. Many of the problems at the lower levels of organisations are often routine and well defined, requiring less decision discretion and analysis. (For example, a relatively junior engineer in the organisation would be competent to carry out the structural design procedure referred to in the previous paragraph.) These are classified as ‘non-analytical’ decisions. Non-programmed decisions, on the other hand, are used for new, unstructured and ill-defined situations of a non-recurring nature, requiring substantial analysis on the part of the decision maker. Because of the unstructured nature of such decisions, managers, as they become more senior, are increasingly involved in these types of decisions (Figure 1.1).

Figure 1.1 Types of problems and decisions at different levels of the organisation.

1.2.2 Analytical decision making

Non-programmed decisions are thus complicated in nature, involving a large number of factors where only correct actions will give rise to the desired results, and correct actions call for correct decisions carried out within an analytical framework. The probability of the correct choice being made in such situations is greatly increased by adopting a ‘reasoned’ or ‘rational’ approach that provides the appropriate analytical structure within which a coherent decision can be formulated.

1.2.3Reasoned choice

The ‘reasoned choice’ model of individual or group decisions provides a technical foundation for non-programmed, non-recurring decisions (Zey, 1992). It comprises the following steps:

Recognising the problem

. The decision maker ascertains that a problem exists and that a decision must be reflected on.

Identifying goals

. The decision maker details the desired result or outcome of the process.

Generating and identifying options

. Different potential solutions are assembled prior to their evaluation.

Information search

. Characteristics of the alternative solutions are sought by the decision maker.

Assessing information on all options

. The information necessary for making a decision regarding the preferred option is gathered together and considered.

Selection of preferred option

. A preferred option is selected by the decision maker for implementation in the future.

Implementing the decision

. The chosen option is brought to completion.

Evaluation

. The decision is assessed after its implementation in order to evaluate it on the basis of its achieved results.

Clear rationality, where a judgement is arrived at following a sequence of deliberately followed logical steps, lies at the basis of this model for decision making.

1.2.4 Classical rational decision making

The principles of reasoned choice have been adapted into an analytic technique, called the rational approach, which has a specific application in the evaluation of project options at the planning stage of a proposed engineering scheme. The proper planning of a major engineering project requires a set of procedures to be devised which ensure that available resources are allocated as efficiently as possible in its subsequent design and construction. This involves deciding how the available resources, including manpower, physical materials and finance can best be used to achieve the desired objectives of the project developer. Systems analysis can provide such a framework of procedures in which the fundamental issues of design and management can be addressed (de Neufville & Stafford, 1974). Engineering systems analysis provides an orderly process in which all factors relevant to the design and construction of major engineering projects can be considered. Use of the process has the following direct impacts on the coherent and logical development of such a project:

The process forces the developer/decision maker to make explicit the objectives of the proposed system, together with how these objectives can be measured. This has the effect of heightening the developer’s awareness of his or her overall core objectives.

It provides a framework in which alternative solutions will be readily generated as a means to selecting the most desired one.

Appropriate methodologies for decision making will be proposed within the process for use in choosing between alternatives.

It will predict the major demands which will be placed on the facility under examination through the interaction of the various technical, environmental and social criteria generated by the process. These demands are not always detected in advance.

The planning of major engineering projects is, therefore, a rational process. It involves a project’s developer acting or deciding rationally in an attempt to reach some goal that cannot be attained without some action. He or she must have a clear awareness of alternative paths by which agreed goals can be achieved within the limitations of the existing environment, and must have both the information and the ability to analyse and evaluate options in light of the goals sought. Within the rational model, therefore, appropriate future action by the developer is determined by using the available scarce resources in such a way that his or her aims and objectives are maximised. It is a problem-solving process which involves closing the gap between the developer’s objectives and the current situation by means of the developmental project in question, the ‘objectives’ being, for example, a more coherent transport infrastructure, a better quality rail service or a more efficient and cleaner water supply system.

The basic rational procedure can be represented by five fundamental steps. They constitute the foundation of a systematic analysis and are summarised in Table 1.1.

Table 1.1 Steps in the rational decision making process.

Step

Purpose

Definition of goals and objectives

To define and agree the overall purpose of proposed project

Formulation of criteria/measures of effectiveness

To establish standards of judging by which the options can be assessed in relative and absolute terms

Generation of alternatives

To generate as broad a range of feasible alternatives as possible

Evaluation of alternatives

To evaluate the relative merit of each option

Selection of preferred alternative/group of alternatives

To make a final decision on the adoption of the most favourable option as the chosen solution

Define goals and objectives

Goals can be seen as conceptual statements that set out in detail the intended long-term achievements of a proposed plan. They articulate the social values to be used within the planning process. Initially, they may only exist in outline form. Considerable data collection and evaluation may need to be undertaken and existing problems may need to be addressed before the goals can be precisely defined. Goals are, by their nature, abstract, and must therefore be translated into quantitatively based measurable objectives. These will form the basis for the criteria used within the process for evaluating alternative options. No appraisal process should proceed without an explicit statement of the objectives of the proposed undertaking. All analyses have a set of objectives as their basis. Much of the value of the planning process lies in the identification of a clear set of objectives.

The process will generate different classes of objectives that may be potentially conflicting. For example, within the planning of major transport infrastructure, the designer may have to reconcile the maximisation of economic and technical efficiency with the minimisation of social and environmental impact. These objectives will each have their own merits, and must be considered by their own individual set of criteria.

In an engineering context, the determination of broad objectives, such as the relief of traffic congestion in an urban area or changing the method by which domestic waste is disposed of, is seldom within the design engineer’s sole remit. Their setting predominantly takes place at what is termed ‘systems planning level’ where input is mainly political in nature, with the help and advice of senior technical experts, some of whom will be professional engineers. The objectives serve to define the ‘desired situation’ that will transpire as a direct result of the construction of the proposed facilities.

Establish criteria

Defining the planning problem involves identifying the actual gap between the ‘desired situation’, as defined by the set of objectives derived, and the current situation, and assembling a range of measures designed to minimise or even close that gap. The ultimate aim of the process is thus to develop a grasp of the relative effectiveness with which these selected alternatives meet the derived set of objectives. Measures of performance, or criteria, must therefore be determined. They are used as ‘standards of judging’ in the case of the options being examined. Preferably, each criterion should be quantitatively assessed, but if, as with some social and environmental criteria, they cannot be assessed on any cardinal scale, it should nonetheless be possible to measure them qualitatively on some graded comparative scale.

The selection of criteria for the evaluation of alternatives is of crucial importance to the overall process because it can influence to a very great extent the final design. This selection process is also of value because it decides to a large degree the final option chosen. What may be seen as most desirable from the perspective of one set of criteria may be seen as much less so using another set of criteria. Thus the selection of the preferred design may hinge on the choice of the criteria for evaluation.

Identify alternative courses of action

Given that the ultimate end point of the process is to identify a preferred solution or group of solutions, it is logical that the decision maker should invest substantial effort in examining a broad range of feasible options. It would not be possible to subject all feasible options to a thorough analysis. Moreover, because resources for the analysis are never limitless, the decision maker must always be selective in the choice of options to be considered within the process. The decision maker must pay particular attention to identifying those alternatives that are shown to be most productive in achieving objectives, while ensuring that effort spent on the analysis of a given alternative does not exceed its anticipated benefits. This process should result in the drawing up of a set of alternative proposals, each of which would reasonably be expected to meet the objectives stated. There is seldom a plan for which reasonable alternatives do not exist.

Evaluate the alternatives

The relative merit of each option is determined on the basis of its performance against each of the chosen criteria. Each alternative is aligned with its effects, economic costs and benefits, environmental and social impacts, and functional effectiveness. This process is usually undertaken using some form of mathematical model. Selecting the appropriate model for the decision problem under consideration is a key step in the evaluation process. In the case of complex engineering projects where numerous alternatives exist and where so many variables and limitations need to be considered, it is at this point in the planning process that the application of decision-aid techniques becomes helpful. Ultimately, people make decisions. Computers, methodologies and other tools do not. But decision-aid techniques and models do assist engineers/planners in making sound and defendable choices.

Selection/recommendation

This is the point at which a single plan or shortlist of approved plans is adopted as most likely to bring about the objectives agreed at the start of the process. This is the real point of decision making, where a judgement is made on the basis of the results of the evaluation carried out in the previous step. As expressed above, because decisions are made by people, value judgements must be applied to the objectively derived results from the decision-aid model within the evaluation process. Political considerations may have to be allowed for, together with the distribution of the gains and losses for the preferred alternatives among a range of incident groups affected by the proposed facilities. The act of selection must, therefore, not be seen solely as a technical problem. This step within rational planning is the point in the process at which the final decision is actually taken.

1.2.5Behavioural decision making

Although the reality of the decision situation may dictate otherwise, rationality assumes that, in order to arrive at the optimum solution for the planning problem under consideration, the decision maker must have:

Complete information regarding the decision situation, that is why the decision is necessary, what stimulus initiated the process, and how it should be addressed.

Complete information regarding all possible alternatives.

A rational system for ordering alternatives in terms of their importance.

A central goal that the final choice will be arrived at in such a way that maximises the economic benefit to the developer.

The basic, central assertion of this theory is that the decision maker, possessing complete knowledge of the problem, can, within the appraisal process, select the option which best meets the needs and objectives of the developer. This approach, termed optimisation, is strongly influenced by classical economics, and assumes that the decision maker is unerringly rational and devoid of personal preferences, motives and emotions. Since this is, in reality, unlikely to be the case, the behavioural model takes account of the imperfections likely to exist in the environment surrounding the planning process for engineering projects. Its originator, Herbert Simon (1976), recognised that full rationality did not accurately describe actual decision-making processes. In contrast to strict classical rationality, behavioural decision theory makes the following assumptions regarding the decision process:

Decision makers have incomplete information in relation to the decision situation.

Decision makers have incomplete information on all possible project options.

Decision makers do not have the capacity or are not prepared to fully foresee the consequences of each option considered.

Simon notes that decision makers are, in reality, limited by their value systems, habits and skills as well as by less-than-perfect levels of knowledge and information. He believes that, while decision makers seek to behave in a rational goal-oriented manner, their rationality has limits. They can be rational in striving to achieve a set of objectives only to the extent that:

they have the ability to pursue a particular course of action;

their concept of the end-point of the process is correct; and

they are correctly informed regarding the conditions surrounding the choice.

Simon called this concept ‘bounded rationality’. A decision maker is rational only within the boundaries laid down by the above limiting internal and external factors. Given that these limitations of information, time and certainty may, in practice, hinder a manager from being completely rational in his decision making, the manager may, as a result, decide to ‘play it safe’ rather than strive to arrive at the ‘best’ solution. Simon called this practice ‘satisficing’, where, rather than searching exhaustively for the best possible solution, a decision maker will search only until an option that meets some minimum standard of sufficiency is identified.

In the context of the planning of a major engineering project, decision makers may practise satisficing for a variety of reasons. A lack of willingness to ignore their own personal motives and objectives may lead to an inability on their part to continue the search after the first minimally acceptable option is identified. They may be unable to evaluate large numbers of options and/or criteria. Subjective considerations, such as the actual selection of criteria for evaluation, often intervene in decision situations. For all such reasons, the process of satisficing thus plays a major role in engineering decision making.

1.2.6Irrational decision making

Both the classical and behavioural theories assume that the decision process involves at least some degree of rationality. Here, options are again generated and evaluated prior to the decision. In this instance, however, the decision maker is assumed to act in an irrational manner, with the final choice made prior to the initial generation of development options.

This model, termed the implicit favourite approach, was put forward by Soelberg (1967). It assumes that the decision maker does not search for the best option or even one that ‘satisfices’. The process is only used as a vehicle for confirming that the initial favourite was the best option available, with spurious and sometimes irrelevant criteria of evaluation being invented to justify the final selection.

It is generally believed that unusual non-recurring decision problems will most often give rise to this type of solution in situations where the decision maker may not have ready-made rules and guidelines at his or her disposal for establishing and evaluating options. It has been found that the more political a decision, the more likely that the irrational model will be used. Political groupings may champion a particular option that they perceive as being to their own benefit. These groups will try to convince others of the chosen option’s merits relative to the others under consideration. If the power position of the group pushing a particular option is strong enough, the opinions of others may not even be taken into consideration within the decision process.

1.2.7Political involvement in the project planning process

In the context of a major engineering development project, the rational view of the planning process incorporates political involvement at two steps:

(1) The determination of community goals is assumed to be the responsibility of political representatives.

(2) The decision/selection process is usually viewed as primarily a political process, with elected representatives acting on the basis of information and advice from professional engineers and planners.

This perspective makes certain assumptions regarding the environment within which the decision is made:

A set of community values and policies exist which is consistent with the goals and objectives of the proposed project.

The project options are developed in response to rationally determined needs.

The decision makers are primarily influenced by the rational evaluations of the various project options put forward by the technical experts.

Routine decisions, handed down on a day-to-day basis by those agencies responsible for the planning of engineering development projects, are generally resolved within a ‘rational’ framework. In many cases such decisions are taken by the professionals within the planning agency, with the political actors merely ratifying their actions. For extraordinary engineering planning decisions, Banks (1998) believes a form of irrational decision making, which he terms the ‘political planning process’, prevails in the case of ‘one-off’ extensive and complex engineering projects. The process is described as ‘proposal oriented’ rather than comprehensive, beginning with a specific development proposal rather than the definition of a broad set of goals and objectives that the chosen project must fulfil. Banks describes such a process as disjointed and confused, with different actors having different concerns and disagreement arising primarily out of people’s lack of understanding of the decision problem. The process itself may be crisis oriented if the project being proposed is one of many such schemes within the political arena, in which case it will only be addressed if the problems which the proposal is intended to solve have reached crisis point.

Banks notes that the political planning process involves the following elements:

A project proposal is made regarding a specific engineering development project. Specific projects such as the construction of a mass transit system for a given urban area or a toll-bridge connecting two major motorway networks could be proposed.

The promoter of the proposal attempts to gather support for it through political influence, compromise or the manipulation of public opinion. Success in this regard could depend on the developer’s ability both to gather political support from other parties in the planning process and to amend his proposal where necessary to gain additional support.

A decisive action occurs, such as the decision of the planning authority or appeals board, to authorise a particular project. This may occur at either central or local government level.

If the decision is favourable, the project is implemented. If it is unfavourable, the project is modified and then reintroduced at the first opportunity. Proposals of this type are rarely abandoned outright – it can fail many times, but it need only succeed once.

These steps are summarised in Table 1.2.

Banks’ view is that the rational process can be incorporated into the political planning process as a means of persuasion. The professionals, such as planners and engineers, will tend to study the proposal within a structured rational framework, and the results of this work will be used within the overall political planning process to justify the project. The problem with this mixing of the two processes occurs where the two conflict with each other. For example, if a comprehensively rational decision process is followed by the professionals involved and results in a decision being reached that is incompatible with the more ‘political’ concerns of both local authority management and the members of the planning appeals board, it will lead to a divisive and unsatisfactory conclusion to the process.

Table 1.2 Steps in the political decision making process.

Step

Purpose

A proposal is made

To define the project as specific and non-choice based

The developer attempts to gather support for it

To generate political momentum in favour of the proposal

A decisive action occurs

To locate the point in the process at which approval/non-approval actually occurs

Resubmission if first submission rejected

If approval is not gained, the ability to continually amend and resubmit the proposal until consent is obtained.

1.3 Primacy of the rational model

The existence of ‘non-rational’ decision processes of the type outlined by Banks must be acknowledged. Such theories offer a useful insight into how, in a particular environment where political considerations tend to dominate, certain one-off, non-recurring project proposals gain approval via this process. However, for the purposes of this book, it will be assumed that the appraisal of engineering projects takes place within a format, overseen by planning specialists, where rational decision making, be it classical or behavioural, is the primary methodology at the basis of decision making. Within Banks’ political planning process model, rational planning is seen as secondary and supplementary to the main process, used by the project promoters as a means of persuasion. Its use as a means of justifying proposals is seen primarily as a political asset rather than as a coherent logical tool for decision making. From the perspective of the professional engineer, it seems appropriate to assert the primacy of the rational model, on the basis of its logical foundation and its wide level of acceptance as an appropriate decision-making technique for use within this sphere of work. Within the rational model, the pivotal step is the evaluation or appraisal process where the relative merit of each proposal is determined. The main purpose of the succeeding chapters within this text is to explain the workings of various appraisal methodologies of direct use to planning engineers.

1.4 Decision-making conditions

While we can assume that decision making is, in effect, an individually-based process, and that it takes place, from the planning engineer’s perspective, within a rational format, the environmental conditions surrounding it can vary markedly. Virtually all decisions are made under conditions of at least some uncertainty. The extent will range from relative certainty to great uncertainty. There may also be certain risks associated with making decisions. There are thus three categories of environmental conditions: certainty, risk and uncertainty.

1.4.1Certainty

Very few decisions are made under conditions of certainty. This state, therefore, never truly exists. The complexity of an engineering project, together with the cyclical nature of the economic environment surrounding it, makes such a condition unattainable. It defines an idealised situation where all project alternatives and the conditions surrounding them are assumed to be known with complete certainty. Suppose an engineering contractor is awarded a project ahead of the other tendering companies on the basis of its bid. While this decision to award may appear to approach the condition of complete certainty, each of the contractors may have written non-identical cost increase clauses into their respective contracts so that the engineer making the decision to award may not be 100% certain of the relative conditions associated with each alternative bidder.

1.4.2 Risk

In a risk situation, the outcomes of the decision are random, with the probabilities of each outcome being known. Under these conditions, the availability of each project option and its potential pay-offs and costs are all associated with probability estimates. The probability in each case indicates the degree of likelihood of the outcome. The key element in decision making under a state of risk is the accurate determination of the probabilities associated with each project alternative. The probabilities can be determined objectively using either classical probability theory or statistical analysis, or subjectively using the experience and judgement of the decision maker. The values derived can then be used in a rationally based quantitative approach to decision making.

1.4.3Uncertainty

In the context of an engineering project, the vast majority of decision making is carried out under conditions of uncertainty. Because of the complex and dynamic nature of the technology associated with present day engineering projects, the decision maker does not know what all the options are, the possible risks associated with each, or what the results or consequences of each will be. In such a situation, the decision maker has a limited database, is not certain that the data are completely reliable and is not sure whether the decision situation will change or not. Moreover, the interaction between the different variables may be extremely difficult, if not impossible, to evaluate.

Consider the environmental appraisal of an engineering development project. Because of the complexity of criteria relating to the estimation of noise and air pollution valuations, the database compiled by environmental specialists for each impact may be incomplete and there may be no guarantee that the values measured will not change with time. The accuracy and reliability of the data are therefore in question, and this uncertainty must be reflected in the decision process.

Under these conditions, if decision making is to be perceived as effective, the decision maker must seek to acquire as much relevant information as possible, approaching the situation from a logical and rational perspective. Explicit estimates of the levels of uncertainty associated with criterion estimates, together with judgement, intuition and professional experience will be of central importance to the decision making process.

Both the newness and the complexity of the rapidly changing technology associated with modern engineering development projects tend to induce uncertainty in their evaluation.

Many of the models outlined in this book as aids to the decision maker in the process of appraisal take explicit account of the levels of uncertainty associated with the relative evaluations of the competing proposals under consideration.

1.5 Project planning process

Accepting the importance of the rational model, certain steps within it are of particular importance in the context of examining an engineering development project. Assuming that such a proposed project will be planned in a logical manner, in an environment where some uncertainty/risk may exist, the three main steps in the process can be identified as:

Identifying the project options.

Identifying the criteria for evaluation.

The appraisal process in which a preferred option is identified.

While the appraisal process may be the most important, the proper execution of the two preceding stages is of vital importance to the success of the overall process, as they provide an invaluable platform for effective appraisal. Let us look at each of these stages in some detail.

1.5.1Identifying project options

A central objective of a given decision situation is the identification of feasible options. The term ‘feasible’ refers to any option that, upon preliminary evaluation, presents itself as a viable course of action, and one that can be brought to completion given the constraints imposed on the decision maker, such as lack of time, information and resources.

Finding sound feasible options is an important component of the decision process. The quality of the final outcome can never exceed that allowed by the best option examined. There are many procedures for both identifying and defining project options. These include:

Drawing on the personal experience of the decision maker himself as well as other experts in the field.

Making comparisons between the current decision problem and ones previously solved in a successful manner.

Examining all relevant literature.

Some form of group brainstorming session can be quite effective in bringing viable options to light. Brainstorming consists of two main phases. Within the first, a group of people put forward, in a relaxed environment, as many ideas as possible relevant to the problem being considered. The main rule for this phase is that members of the group should avoid being critical of their own ideas or those of others, no matter how far-fetched. This non-critical phase is very difficult for engineers, given that they are trained to think analytically or in a judgemental mode (Martin, 1993). Success in this phase requires the engineer’s judgemental mode to be ‘shut down’. This phase, if properly done, will result in the emergence of a large number of widely differing options.

Table 1.3 Example of T-Chart.

Proposed option vs. an accepted ‘tried and tested’ solution

Better

Worse

Construction cost

Maintenance Cost

Visual appearance

Technical innovation

The second phase requires the planning engineer to return to normal ­judgemental mode to select the best options from the total list, analysing each for ­technological and economic practicality. This is, in effect, a screening process that filters through the best options. One such method is to compare by means of a T-chart each new option with an existing, ‘tried-and-tested’ option that has frequently been used in previous similar projects (Riggs et al., 1997). The chart contains a list of criteria which any acceptable option should satisfy. The option under examination is judged on the basis of whether it performs better or worse than the conventional option on each of the listed criteria. An example of a T-chart is given in Table 1.3.

In the example shown in Table 1.3, the proposed option would be rejected on the basis that, while it had a lower construction cost, its maintenance costs and visual appearance, together with its relatively limited degree of technical innovation, would eliminate it from further consideration.