With the African market becoming more mature and understanding the project execution models better, there has been a big rise in EPC (Engineering, procurement and construction) projects being executed in Africa.
Although EPC project have been executed all over the world, it’s a very new model for Africa and South Africa and project houses do not really understand how to execute the projects using an EPC execution model.
The traditional consultants mostly based in South Africa, have been used to the EPCM (Engineering, procurement and construction management) execution models. This model draws a clear line in the sand between the consultant doing the engineering and management and the construction contractor doing the construction. The EPC project execution model takes this line away and both the consultant and contractor have to work together to execute the project.
This is very new to the South African consulting market who traditionally enjoyed the EPCM models and being in charge of managing the construction contractor. It’s also very new to the South African construction industry. The construction contractors were used to getting bill of quantities to price and taking no engineering risk for the projects.
This phenomenon has led to the birth of a new breed of EPC contractors that can handle the engineering, procurement and construction component of the project. These EPC contractors have all the important skills in-house to execute these projects successfully.
In a desperate attempt to keep up with the industry, some of the engineering consultants and construction contractors form alliances to execute EPC projects together, this can work in principle, but combining the two cultures makes it very difficult to execute these projects smoothly. You often find that these relationships only last for one or two projects and then they end up in the courts.
The biggest reason for this disconnect it the fact that the engineering consultants want to charge their services per hour or at least build up their lump sum taking hours into consideration. The construction contractors on the other hand are used to lump sum construction and if something is not designed correctly, they can submit big claims to increase their price.
In this article we will try to outline the way an EPC project should actually be executed and how the consulting engineering and construction component of the project should meet each other to execute the project successfully.
In the EPC project environment, the client does not usually give a detailed bill of quantities to price. They issue the EPC contractor with a performance specification telling them what they want from the project. It’s then up to the EPC contractors’ engineering team to detail the project during the tender engineering phase. You often find that the most mature EPC contractors have rates built up from previous projects and know exactly what a piece of infrastructure in that sector and location should cost. If we take a tank farm for instance, it often happens that the EPC contractor quotes the project on a cost per cube basis rather than breaking the scope up into a bill of quantities. In some instances when the client gives enough time to quote, the EPC contractor will work out their price using both options. The BOQ option is known as the bottom up approach and the “Cost per Unit” option is known as the top down approach.
Once the project costing is done and the project is awarded to the EPC contractor, the real work starts. It’s very important that the engineering team does value engineering, not by having one or two reviews but in a lot of detail. They have to work with the construction team and find better ways of executing tasks and reduce material cost as much as they can without compromising quality. This team will continue to support the construction and procurement teams for the remainder of the project.
Next, it’s the procurement team that needs to focus on getting the best prices with the best payment terms. Inexperienced EPC project managers often make the mistake to tie up all their materials and sub-contracts while they are tendering the project or very early on while setting up the new project. This however is not the way a EPC project should be executed but rather the way a EPCM project gets executed. With the EPC project, you gain valuable information as you develop your engineering and methods of installation. You often find that the way you wanted to execute a portion of the work during the tender phase has changed completely and the service providers you were talking to during tender phases are not the right fit anymore. It’s also a fact that your negotiating power improves a lot once you have the job in the bag. Once the service providers know you have won the job, they take the costing very serious and you often find that you have a lot of options and get better pricing for the same services or materials.
It’s also very important that the EPC project manager understands who to use as sub-contractors. Common mistakes project managers make, is to assume that big companies know what they are doing and then try to sub-contract a large company. The rule of thumb would be not to sub-contract to a company that’s bigger than your own organization, but in general keep it a lot smaller than your organization. Although there’s nothing wrong with big companies, it’s very difficult to control such a large organization and you often get caught between your client and another big company with some commercial dispute and it will flatten your company in the process. When you look at tendering an EPC project with a large corporation, it would be better for the larger company to lead and the smaller party to sub-contract.
A good way to find value for money when executing EPC projects, is to find owner run smaller businesses where all the knowledge and skill lies with the owner and a few of their employees. Even though larger organizations have great track records, you are never sure what team you will get if you execute the work. It also happens in the EPC environment that things keep on changing as the project progresses, although change management is very important on these projects, certain changes might be changes that the EPC contractor needs to make while improving the execution strategy. In situations like this, it’s very important that your sub-contractors helping you with the project have a common goal and objective and is flexible enough to absorb some of the changes without following a change management process themselves.
When outsourcing any portion of work, ensure that you completely understand the scope you are outsourcing and keep the risk with the contractor that can manage the risk. If you do a fuel storage tank for instance and you plan on outsourcing the civil works to a local contractor, it won’t help to give them a design and build contract for the tank foundations as they have probably never completed this scope of work. A better way outsourcing this service would be to keep the design in-house, get them to do most of the standard civils themselves and then have your experienced personnel guide them with the foundations while using their tools and personnel.
When using EPCM execution models, it’s important to do a full work breakdown structure and then assign packages to each contractor that needs to be appointed. When executing an EPC project, try to steer away from giving packages away especially when it’s a large portion of the scope to sub-contractors. If you do not have the skill in a certain area, perhaps look at doing a joint venture with somebody that has the skill and understands the scope of work. When you outsource a scope you do not know, you will have a big risk of losing control of the project but being commercially responsible for the project.
This leads us to the following point, don’t execute projects on a EPC basis if you do not understand the scope. A good way to get into EPC projects is to start with EPCM models of execution until you feel comfortable enough with the scope to execute it on a EPC basis.
When pricing a EPCM project, the EPCM contractor takes some risk, but the only real risk is a risk of spending more hours on the project than they planned to spend. Although the risk is real, it’s a relatively low risk and can be managed with the correct change management procedures. The EPCM contractor thus adds some risk to their price but it’s very small when compared to the total capex of the project. The real risk gets added when the construction contractor prices and then the fact that the EPCM Contractor and construction contractor is not aligned, could add a lot of additional cost to the project.
When a EPC project gets priced, understanding the risk component is very important. Different locations and complexities of projects carry different risk components. It’s thus very important that all these factors get taken into consideration to determine a risk component. A typical EPC risk component is in the range of 10-20% of the capex. This sounds like a lot, but once you get into the project, this never seems to be enough. It’s also important that enough profit margin is built into the EPC models as this also creates a buffer during execution.
Once most of the engineering and procurement activities have been completed and the correct sub-contractors are selected, the construction activities can take place.
During construction, it’s very important that the EPC contractor keeps control of the project, it’s very easy at this stage to lose control. Every aspect of the project needs to be optimized during the construction phase. Project managers often make the mistake of judging each component of the construction from the budget they have built for the project. The biggest problem is that you approve cost for a certain scope of work because it falls in your budget, but then something changes on another piece of scope and suddenly you are way over budget with that portion. As a EPC project manager, you should thus drive each component of the project to ensure the optimal savings are generated. If you can do a portion of scope for a better price than you priced, make sure you bank this saving. You might need it later on in the project where a component might cost you more than you planned for.
When the construction teams are on site, it’s important that the EPC contractor has strong management on site from their own organization. The management team should consist of construction management, contract management and engineering management. Health, safety and environmental will report to the construction manager. By having strong management on the construction site, problems and changes can be handled on site and put to bed before it becomes a big issue. It’s also important that the in-house resources manage the client relationship on site as well as the cost, schedule and quality.
A very good way of creating common objectives on a EPC project, is to keep all the savings in a project account that gets shared with the resources and sub-contractors at the end of the project. This creates a common goal for all the guys on site and ensures your project has the right drivers during the construction phase.
Although the EPC project manager does not have to be on site full time, it’s very important that he visits the site on a regular basis to ensure all parties are aligned. He should be joined by his project planner and contracts manager. They should focus on construction progress and scope creep. Progress should be monitors actual versus planned, a basic S-curve works well for this weekly progress measurement. The contracts manager should ensure that scope is executed in accordance with the approved scope of work and accepted schedule.
If a problem gets identified or delays occur, the team should get together as soon as possible to determine the impact, find a way of solving the problem or delay and record the outcome. The sooner problems or delays get identified, the better chance the project team has to solve the problem or get the project back on track.
Critical path management is a good way of managing the project schedule. By focusing on the important aspects and ensuring they get executed correctly, the team can focus on keeping the project on schedule. When the items that’s not on the critical path gets delayed, it gets recorded but only becomes critical once it gets close to the critical path of the project. This way, effort is not wasted on managing everything, but only the items that will have an impact on the overall project schedule. This way of management is also known as the 80-20 principle.
Once the construction phase is executed successfully, the project moves over to the commissioning phase. During commissioning, the client often gets involved to assist. During this phase it’s very important that a transition happens between the EPC contractor and the client. If this commissioning process is a painless process for the client and the project is a success, it will buy a lot of loyalty from the client. Also ensure that the important resources on the project are on site during this phase to ensure problem shooting gets done effectively.
During the commissioning phase, very experienced resources are needed, this is not the place to save any money, but to ensure the asset works. If something goes wrong during the commissioning, you want the correct resources on site to solve the problem. There’s a common example where the client was battling to commission a machine and had to call for expertise. When the expert arrived on site, he set one screw and the machine started. He gave the client his very expensive invoice for this work, the client complained and asked why it’s so expensive as he only set one screw. His response was that setting one screw is not worth a lot of money but knowing what screw to set is.
After the asset is commissioned, the EPC contractor usually has a 52-week defects liability period. During this phase, the EPC contractor often helps with the operations and maintenance as well. Ensuring the knowledge is transferred from the construction phase helps a lot and also ensures that defects can be repaired without major cost implications.
Once the defects liability period is over, the EPC contractor’s liabilities are usually over with some exceptions for certain OEM equipment. The OEM liabilities will usually be back to back and the OEMs will usually honor their own guarantees.
If the project is executed successfully and the EPC contractor is in the mood for more, the whole process starts again.
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