Big data, digitalization, interdisciplinary insights, concurrent engineering and global engineering are all contributing to an engineering evolution that is happening around the world, across all technologies and across all disciplines. In this environment, engineering, procurement and construction companies (EPCs) of all sizes are searching for ways to increase their margins and profitability, expand their portfolios and technology offerings and improve relationships and win-rate.
The EPC landscape is changing, and most EPCs do not have a handle — quantitatively or qualitatively — on what risks they face and how those risks are affecting success. When faced with unknown risks, most companies default to what they do know, which is “we need more projects.”
There are three main areas of risk for EPCs: project execution, process design and cost estimation. Without a true understanding of these risks, EPCs will be unable to effectively meet their goals.
For an EPC, a slipping schedule can mean a financial penalty as well as damage to the company’s reputation. It also very well might mean the customer will go elsewhere for the next phase of design! Plus, going over budget eats into the EPC’s profit margin on that project.
The risk in project execution essentially boils down to data handling. How do we store, organize, share and digest the mountain of data that we generate throughout the project lifecycle? How do we eliminate manual entry, connect our engineering tools and automate the more mundane tasks, freeing up our engineers to focus on high-value, high-profit tasks and decision making?
The bottom line is, EPCs are looking for a way to digitalize their project execution. They are looking for a central repository of engineering data; they are searching for opportunities to automate processes; they are seeking revision control and unit of measure control; they need improved management of change; they are exploring interdisciplinary workflows; they want to re-use as much previous work as possible and create “off-the-shelf” designs as much as they can. And above all, EPCs require customizability and versatility, because no two projects are the same.
Digitalization inherently saves time, improves the quality and fidelity of project deliverables, mitigates the risks associated with project execution and vastly improves profit margins. Those EPCs who are willing to re-engineer the way they engineer will be the leaders of tomorrow.
The actual process EPCs design is also a major source of risk. EPCs must ask themselves, how comfortable are we with our process guarantees? How confident are we that we are minimizing on capital cost in our design?
With a quantitative analysis, EPCs can minimize risk with regard to process guarantees and minimize capital expenditures, leading to more confidence in designs. Plus, a quantitative analysis allows the EPC to make more accurate and profitable decisions earlier in the project lifecycle, which leads to less change and re-work later in the project.
By completing such analyses, EPCs also have a tremendous opportunity for value-add engineering. Imagine for a moment you are an owner/operator, and you send a request for a quote out to three EPCs:
The first comes back and says that the project will cost $100 million.
The second says they can do it for $97 million.
The third says that the base design for the project would be $102 million, but assuming the asset will be in operation for 30 years, they recommend investing another $20 million in X and Y. They also estimate that the value of the operating asset will increase by $1 billion over that 30-year period, resulting in an ROI of 4,900%.
Which EPC would you choose to execute your project?
This value-add analysis is a differentiator. It proves knowledge and understanding of the industry, and it starts a conversation with the customer, helping to improve the relationship. Simply put, it makes the EPC stick out.
EPCs need to rely on the numbers to help drive their decision-making, instead of doing what has been done in the past. The EPC world is changing, and EPCs cannot rely on the past to build the future.
Uncertainty is risk, and there are few things as uncertain for EPCs as their cost estimates. If the estimate is too low, the EPC gets less revenue. If the estimate is too high, the EPC could lose the confidence of the customer and ultimately lose the deal, and also miss out on additional projects and revenue because they have used all of their capital project budget due to continual high estimates.
To help manage this risk, EPCs use a catch-all, referred to as contingency, in their estimates. This acts as a buffer for the unknown costs and unknown future pricing of materials, wage rates, etc. To estimate contingency, most EPCs rely on past projects or just use a standard percentage of the total cost. Essentially, they employ more of a qualitative approach.
But what if EPCs could, much like what is needed to manage the process design risk, utilize a quantitative analysis to determine the exact amount of contingency needed on a project according to their own probability of cost overrun?
By utilizing such an analysis, cost estimators and EPCs can generate more accurate cost estimates. The more accurate the cost estimate, the lower the risk of cost over-run or under-run and the higher the revenues.
But just like with the project execution risk, there is a large amount of data involved in an estimate, and the estimate must be able to adapt as the project evolves over time. Being able to manage and navigate that data, to understand the numbers, and to report those results for the project team and management is also paramount.
By managing the data behind the estimate and providing more accurate estimates, an EPC can effectively mitigate any risk involved with their cost estimations. The unknowns and the uncertainties become more visible and more understood.
The goals of increasing margins and profitability, expanding portfolios and technology offerings, and improving relationships and win-rate can only be achieved by re-engineering the way you engineer.
EPCs must address deficiencies and inefficiencies in their project execution. They have to quantitatively analyze their designs to make sure they are minimizing on capital cost, as well as differentiating themselves from their competition. And EPCs need to be as certain as possible and have a deep understanding in their cost estimations.
The EPC world is evolving. If EPCs don’t evolve with it, then they run the risk of becoming extinct.
Learn how you can become more agile in bidding, project execution and handover of digital project data in our white paper Optimize Asset Design and Operations With Performance Engineering.