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CONSTRUCTIONCONSTRUCTIONCONSTRUCTIONCONSTRUCTIONCONSTRUCTION INDUSTRYINDUSTRYINDUSTRYINDUSTRYINDUSTRY INSTITUTEINSTITUTEINSTITUTEINSTITUTEINSTITUTE

REFORMING OWNER, CONTRACTOR, SUPPLIER RELATIONSHIPS:

A PROJECT DELIVERY SYSTEM TO OPTIMIZE SUPPLIER ROLES IN EPC PROJECTS

Research Summary 130-1

Construction Industry Institute

Air Products & Chemicals, Inc.

ABB

Lummus Global Inc.

AlliedSignal Inc. Aluminum Company of America Amoco Corporation Anheuser-Busch Companies, Inc. Aramco Services Company Atlantic Richfield Company Bayer Corporation

BE&K, Inc. Bechtel Group, Inc. Belcan Corporation Black & Veatch BMW Constructors, Inc. Brown & Root, Inc. Bufete Industrial

Celanese

Burns and Roe Enterprises, Inc.

Champion International Corporation

CDI

Engineering Group, Inc.

Chevron Corporation

Chemtex International Inc.

CITGO Petroleum Corporation Commonwealth Edison Company

Cherne Contracting Corporation Cianbro Corporation

DuPont

Day

& Zimmermann International, Inc.

Eastman Chemical Company

Dick Corporation

Exxon Research & Engineering Company FPL Energy, Inc. General Motors Corporation Houston Lighting & Power Company Intel Corporation Eli Lilly and Company Mobil Technology Corporation NASA Naval Facilities Engineering Command

Dillingham Construction Holdings Inc. Eichleay Holdings Inc. Fisher Controls International, Inc. Fluor Daniel, Inc. Foster Wheeler USA Corporation Fru-Con Construction Corporation James N. Gray Company, Inc. Graycor H+M Construction Co., Inc.

Ontario Hydro

Hilti

Corporation

Phillips Petroleum Company

Honeywell Inc.

The Procter & Gamble Company Rohm and Haas Company Shell Oil Company

International Technology Corporation Jacobs Engineering Group, Inc. J. A. Jones Inc.

Solutia Inc.

The

M. W. Kellogg Company

Tennessee Valley Authority Texaco U.S. Army Corps of Engineers

Kiewit Construction Group, Inc. Kværner Process Morrison Knudsen Corporation

U.S. Department of Commerce

M.

A. Mortenson Company

U.S. Department of State

Murphy Company

U.S. Generating Company

North Bros., Inc.

U.S. Steel

The

Parsons Corporation

Union Carbide Corporation

Raytheon Engineers & Constructors

The University of Texas System

S&B

Engineers and Constructors Ltd.

Weyerhaeuser Company

Stone & Webster Engineering Corporation TPA, Inc.

H. B. Zachry Company

Reforming Owner, Contractor, Supplier Relationships:

A Project Delivery System to Optimize Supplier Roles in EPC Projects

Prepared by The Construction Industry Institute Reforming Supplier Relationships Research Team

Research Summary 130-1 September 1998

© 1998 Construction Industry Institute™.

The University of Texas at Austin.

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Available to non-members by purchase; however, no copies may be made or distributed and no modifications made without prior written permission from CII. Contact CII at http://construction-institute.org/catalog.htm to purchase copies. Volume discounts may be available.

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to purchase CII products at member prices. Faculty and students at a college or university may reproduce and distribute this work without modification for educational use.

Printed in the United States of America.

Contents

Chapter

Page

Executive Summary

v

1. Introduction

1

2. Development of the Breakthrough Model

4

3. Measuring and Quantifying Its Effects

16

4. Implementation

21

5. Recommendations

27

6. Postscript

29

References

33

Executive Summary

By expanding its membership to include suppliers, CII recognizes that suppliers of key engineered systems and components can and should play a significant role in the pursuit of CII goals. CII, therefore, established the Reforming Supplier Relationships Research Team to explore the potential for reforming traditional owner/contractor/supplier relationships in engineer-procure-construct (EPC) projects to enhance the ability of suppliers to contribute more meaningfully to this process.

Believing that a breakthrough approach would be required to facilitate such a reformation, this research team concluded that if the role of suppliers of the most critical components and systems in a project is to be enhanced, then one must both enhance and prioritize the point of definitive contact with those suppliers: the procurement process. A new project delivery system was envisioned that divides the procurement process into “big P” — strategic procurement items, including complex engineered equipment and systems essential for project performance, and “little p” — the balance of items to be procured; and then reconfigures the traditional EPC model into Procurement, Engineering, procurement, and Construction, or PEpC.

In traditional EPC, procurement follows engineering, both sequentially and in the fact that engineering specifies and defines the items to be procured. In PEpC, the most strategic and project-critical procurement transactions occur prior to detail engineering, and those procured items then influence and define subsequent detailed engineering. Further, the core competencies of the supplier, which are often unique and beyond those possessed by either the owner or contractor, are provided directly into the project delivery system.

Utilizing a sophisticated simulation model of the classic EPC process, the research team compared the impact of a PEpC approach to project execution with traditional EPC. In both theoretical and field implementations, the results indicated that PEpC could produce savings in excess of 10 percent to 15 percent of the time and four to eight percent of the cost of the traditional EPC process.

v

1

Introduction

A Challenging Mission

Membership in CII traditionally has been limited to the principal consumers and principal providers of engineering and construction services, i.e., owners and contractors. Recently, CII expanded its membership categories to include the suppliers of major materials, equipment, and systems that are incorporated into construction projects. This membership expansion arose from the recognition that suppliers of key materials, equipment, and systems can and should play a significant role in pursuit of CII’s mission to improve the cost, schedule, quality, and safety of the construction industry.

With this new recognition of the supplier community, CII created the Reforming Supplier Relationships Research Team and tasked it with examining the relationships and roles of suppliers in traditional EPC construction. More specifically, the research team was asked to explore the potential for reforming the traditional owner-contractor- supplier relationships in EPC projects in order to enhance the ability of suppliers to contribute more meaningfully to the process.

The research team recast this assignment into the following problem statement:

Strategic procurement items, including complex engineered equipment and systems essential for project performance, are frequently designed, manufactured, and delivered by suppliers who are outside the traditional “circle of cooperation” between owner and contractor. The expertise embedded in the design of this equipment, as well as the expertise needed for its successful integration, operation, and maintenance is frequently lost or under utilized. The resulting inefficiencies have an impact on the time, cost, and quality of engineering and construction as well as on the life cycle performance of constructed facilities.

1

After considerable discussion, and believing that a meaningful solution could be found, the research team posed the following hypothesis that would become the subject of its future efforts:

It is possible to systematically reform relationships between owner, contractor, and supplier so that suppliers of strategic procurement items and/or systems can be included in the full EPC process and thereby have a significant positive impact on the time, cost, and quality of the entire engineering and construction process, as well as on the life cycle performance of constructed facilities.

The hypothesis was based on the belief that substantial savings in time and cost could be realized if a step change in traditional owner/ contractor/supplier relationships could be achieved in such a way as to make it possible for suppliers to contribute effectively in every phase of the total facility life cycle. It was clearly felt that owners, design contractors, and construction contractors would benefit from new and dramatically different relationships with suppliers, who should no longer be silent partners in the EPC process.

An Innovative Methodology

Addressing the problem statement and confirming the hypothesis required a research effort that extended beyond the classic steps of identifying a problem, gathering data, examining results, and recommending change. A suitable methodology was, therefore, developed that included the following four key steps:

1. Initiating an extensive search for innovation within and beyond the boundaries of the industrial construction industry.

2. Defining a breakthrough project delivery system, which would make it possible to utilize supplier expertise in all phases of the project life cycle.

3. Measuring and quantifying the effect of implementing the breakthrough in both theoretical and field implementations.

2

4. Developing

the

required

tools

to

facilitate

the

routine

implementation of the breakthrough throughout the industry.

The results of Steps 1 and 2 are covered in the following chapter. The measurement process is discussed in Chapter 3; and implementation procedures are in discussed in Chapter 4.

3

2

Development of the Breakthrough Model

A Search for Innovation

The research team set out to identify instances or trends of enhanced supplier involvement, both within and beyond the construction industry. A literature survey, a mail questionnaire of CII member companies, and a number of structured interviews by research team members were used to identify and study instances where owners, contractors, or suppliers had successfully developed or employed innovative or atypical relationships within the EPC process.

Four principal conclusions flow from this effort:

1. There is both need and precedent for the development of a step change to the EPC process that brings suppliers of strategic components and/or systems for a project into the circle of cooperation between owner and contractor.

2. The analysis of the questionnaire results showed that suppliers were, in numerous cases, being used in an expanded role with regard to status, time of involvement, and expected role, but that business and commercial relationships remained narrowly and traditionally defined.

3. The interviews conducted by research team members confirmed pockets of innovation within the industry and presented strong anecdotal evidence of reductions in time and cost due to the early involvement of strategic suppliers.

4. The survey of associated industries showed that at least two industries, the automotive manufacturing industry and the micro-electronics construction industry, had improved performance by expanding the role played by suppliers and that many of their lessons could be transferred to the mainstream industrial construction sector.

4

Defining a Breakthrough Delivery System Model

The research team was convinced that a step change to the EPC process that would bring suppliers of strategic items and/or systems into the circle of cooperation between owners and contractors was both necessary and possible.

Discussion among the varied interests represented by the research team membership led to a discussion during which the members came to the following conclusion:

If one really desires to enhance the role of suppliers of the most critical components and systems in a project, then one must both enhance and prioritize the point of definitive contact with those suppliers: the procurement process.

This led the research team to envision a project delivery system that takes the “big P” for procurement in the EPC process and places it before the E for engineering so that the technical knowledge and expertise of major suppliers can be integrated into all phases of the project from the beginning, thus PEC.

In recognition of this change and the fact that a number of non- strategic procurement items would continue to be procured in the traditional way (little p), the research team designated the process PEpC.

This, together with the need to accommodate a variety of interests and applications, led to the following broad definition:

PEpC (Procurement, Engineering, procurement, and Construction) is an innovative project delivery system which makes it possible to utilize key supplier expertise in all phases of the project life cycle by developing an advance procurement strategy and by actually reaching full commercial and contractual agreement with suppliers of strategic procurement items and/or systems prior to the principal project engineering activities.

5

Refining the Breakthrough

The fundamental and essential characteristic of PEpC compared with classic EPC is that procurement of the most project-critical components is accomplished prior to all but the most preliminary engineering efforts. (In this context, procurement means concluding a full, complete, and binding contractual agreement between the buyer and seller for one or more specified products and or services.)

In traditional EPC, procurement follows engineering, both sequentially and in the fact that engineering specifies and defines the items to be procured. In PEpC, the most strategic and project-critical procurement transactions occur prior to detail engineering, and those procured items then influence and define subsequent detail engineering. More importantly, the suppliers of such project-critical components are no longer passive compliers with specifications generated by engineering, but can now play an active role in defining their own contribution to the engineering and design process, as well as those of other related and downstream suppliers.

The “big P” procurement in PEpC should not be confused with early or advanced purchasing strategies frequently utilized in EPC projects to deal with long-lead items. In traditional EPC, early purchase of long-lead items occurs principally, and often solely, to preserve the scheduling interests of the project. In PEpC, however, early procurements are concluded with the principal intent of bringing selected suppliers of project-critical components into the owner and contractor “circle of cooperation” so that suppliers can more effectively contribute to and influence downstream engineering and other front-end activities and decisions, i.e., to deliver supplier core competencies directly into the project delivery system and not indirectly via the owner or contractor.

The idea of utilizing supplier knowledge and expertise in developing project designs and specifications is certainly not new. Any experienced engineering designer or specifier knows the value of supplier input, just as any supplier representative knows the importance of maintaining contact with engineering.

6

The problem traditionally faced by engineering specifiers has been generating a suitable specification or design that is sufficiently generic to maintain a competitive environment. Specifiers could utilize some supplier knowledge and expertise in generating a design or specification, but not too much — lest they inadvertently create the dreaded “sole-source” specification. Once a supplier is finally selected, it is often too late, too time-consuming, or too costly to take full advantage of the supplier’s expertise, and thus the opportunity to incorporate supplier-specific refinements, improve- ments, or suggestions that could provide savings in time or cost, or enhancements to quality is lost.

In PEpC, however, there is no impediment to the flow of knowledge and expertise since the commercial relationship of the supplier and purchaser has already been defined as the result of a conclusive procurement transaction (a supply contract, purchase order, or subcontract); and there is no longer a need to maintain a generic engineering design solely for the sake of preserving a competitive environment.

Procurement without Engineering?

How does one purchase the most important systems and components in a particular project without an engineering design and detailed specifications? PEpC does not banish engineering to the hinterlands; in fact, PEpC actually creates new and challenging opportunities that enhance the roles of both the engineering and procurement functions in the project delivery process.

In a PEpC approach, the engineering function, based on the most preliminary and conceptual of designs for a project, would identify the strategic and project-critical systems and components. Instead of then producing detailed designs and design specifications, however, engineering would define the desired characteristics of those systems and components in terms of their role or contribution to the overall project objectives. Detailed engineering designs and design specifications would be replaced with conceptual designs,

7

performance specifications, or even broader supplier services concepts as the basis for procurement transactions — creating opportunities for suppliers to offer components, systems, and services which best support the overall process or project objectives. Instead of low-bid compliance with a detailed design specification being the basis for procurement awards, PEpC allows broader and more comprehensive evaluation criteria that ultimately measure the total value of a supplier’s offering, including the supplier’s expertise and competencies associated with its products and services.

PEpC also creates enhanced opportunities for suppliers to offer and accept broader roles in the project delivery process. Depending on their individual capabilities and competencies, suppliers can expand their roles beyond the traditional “ship the specified product” to include enhanced design responsibilities, installation, maintenance, and even operation of their equipment in the completed facility.

Both engineering and procurement will be challenged to break their traditional molds and generate procurement packages, and associated evaluation criteria, that create and maximize opportunities for suppliers to offer and deliver greater value and a broader range of responsibilities in the overall project delivery process.

The Great Debate

Two major questions arose among the research team members in their efforts to precisely define their new creation which led to several vigorous and highly spirited debates:

First, does PEpC require that the procuring entity have or establish strategic alliances or partnering relationships with the suppliers of strategic components and systems?

The answer is no. The PEpC model requires simply that the procurement of certain project-critical and strategic components be accomplished prior to detailed engineering. There are many ways to

8

initiate and conclude a procurement transaction — from the most hard-nosed, low-bid, sign-the-killer-contract approach, to the warm- and-fuzzy, we-trust-you, you-trust-us relationships.

The essential requirement in PEpC is simply that the procurement transaction be consummated, including all of its commercial and contractual details, utilizing the means and methods most appropriate under the circumstances, while preserving the competitive technical and commercial interests of the purchaser. Just as partnering and strategic alliances have been shown to be of benefit in some traditional EPC relationships, so too they may also be of value in initiating and concluding the procurement transactions under PEpC. They are not essential, however.

In this context, the role and value of the competitive bid process in both traditional EPC as well as in PEpC were also examined. Managers responsible for the fiscal interests of a project are often concerned when supposedly noncompetitive procurement practices are engaged. “How do we know we are getting the best price?” they ask.

As was mentioned, PEpC does not require the abandonment of competitive bidding practices; it simply suggests that the basis of the competition should be on a broader and more conceptual basis focusing on a supplier’s ability to deliver greater value to the project rather than simply lower price.

Further, our infatuation with the competitive bid process may be overvalued. A low bid to a fully defined detail specification is simply the competitive market value for what was specified, or for what was perhaps over-specified, misspecified, or not even needed. The infamous $400 government hammer was the product of a competitive bid process. The traditional competitive process based on detailed specifications assumes that the “specifier knows best” and greatly diminishes the opportunity for suppliers to contribute their knowledge, expertise, and competencies in response to the purchaser’s true needs.

9

For the most critical, complex, and strategic components in a particular project, the purchaser’s interests will often be better served by exploring alternative methodologies which permit the developers and suppliers of those components to assume a greater role in the design, specification, and selection of components consistent with the purchaser’s needs, expectations, and fiscal restraints.

Second, does a PEpC approach to a project imply that the procurement of the most project-critical components, since it is accomplished prior to detailed engineering, must be accomplished by owners rather than contractors?

Again, the answer is no. If an owner has the capability, resources, and experience to undertake the procurement of strategic and project- critical items, and such items are central to a proprietary owner process or a branded end-product of the facility, then the owner should more likely be responsible for the “big P” procurement. If, on the other hand, an owner does not have the capability, resources, or experience required, or the strategic and project-critical items are integral to a broader contractual responsibility assigned to an engineering or construction contractor, then the contractor should execute the “big P” procurement.

Defining the Benefits

Utilizing a sophisticated simulation model of the classic EPC process, the research team was able to document and measure the impact of a PEpC approach to project execution compared with traditional EPC. In both theoretical and field implementations, the results indicated that PEpC could produce savings in excess of 10 percent to 15 percent of the time and four to eight percent of the cost of the traditional EPC process.

10

In addition to the measured benefits of PEpC, however, there are a number of other benefits that may flow from the implementation of PEpC and the enhanced supplier contributions it envisions. These

include:

• Improved quality of the detail design.

• Improved system and facility performance.

• Earlier deployment of new technologies.

• More equitable allocation of risk.

• Improved utilization of supplier core competencies.

• Reduction or elimination of redundant work processes.

• Diminished need for owners or contractors to maintain non- core competencies that are more effectively maintained and delivered by suppliers.

Utilizing Core Competencies

As an essential ingredient in the discussion of optimizing the relationships among owners, contractors and suppliers, the research

team examined the issue of core competencies. In doing so, it utilized the CII publication, Owner/Contractor Work Structure: A Process Approach (Research Summary 111-1). That publication identifies 30 competencies required for the successful execution of an EPC project.

A few are identified as essential or core competencies of owners,

others of contractors. The majority of the listed competencies, however, were in the middle-ground, subject to what is called structural alignment on a project-by-project basis according to the

unique demands of each project. Figure 1 illustrates the assignment of

a few competencies to either the owner or contractor, and the unaligned balance in the middle.

11

Owner

Structural Alignment

Contractor

Business

Alliances/Partnering Benchmarking/Metrics Commissioning/Startup/ Perf. Testing Conceptual Cost Est. Constructability Construction Mgmt. Convert Research to Project/Scale Up Definitive Cost Est. Detail Design Environmental/Permits Field Quality Control Legal/Contract Admin.

to Project/Scale Up Definitive Cost Est. Detail Design Environmental/Permits Field Quality Control Legal/Contract Admin.

Lessons Learned Maint. & Operability Prelim. Design/Scope Process/Concept.Design Procurement Project Controls Project Management Planning & Scheduling Risk Management Safety Team Building Technical Expertise TQM

Project Controls Project Management Planning & Scheduling Risk Management Safety Team Building Technical Expertise TQM

Construction

Dev.

Financial

Approval

PM

Approval PM
Approval PM

Oversight

Setting

Project

Goals,

Objectives

& Priorities

 

Figure 1. Owner/Contractor Distribution of Competencies

The work of CII’s Owner/Contractor Work Structure Research Team focused only on two entities, owner and contractor. The Reforming Supplier Relationships Research Team attempted to expand that discussion of competencies to include a third entity — suppliers. If suppliers of strategic and project-critical items are to be invited into the “circle of cooperation” between owner and contractor, what competencies do they offer? More importantly, what competencies do they possess which might supplement or even displace competencies currently maintained by owners and contractors? Finally, what core competencies should a supplier possess as a minimum requirement for admission into the “circle of cooperation”?

Ultimately, the 30 original competencies did not adequately handle the additional considerations that resulted when suppliers were added to the discussion. The research team identified six additional competencies and then attempted to redistribute all 36 competencies among the owner, contractor, and supplier entities. The results were interesting, but inconclusive, indicating that to varying degrees, each

12

entity could or should possess some element of nearly each of the competencies. The competency commissioning and startup is a good example: the project facility will be operated by the owner and, therefore, the owner should have a significant role; so too should the engineering and construction contractors who designed and built it; and then consider the suppliers of the major system components who, in many cases, will actually provide startup technicians for their systems and equipment.

In an effort to resolve this dilemma, the research team attempted to distribute the competencies based on which entity should take the lead role in delivering the competency to the project. Here too, the results were again inconclusive and prompted the conclusion that an abstract attempt to permanently assign competency roles was not useful; leading to assignments that were ambiguous, misleading, or disputed. Ultimately, the research team concluded that assignments of competency roles should be based on the particular needs of a particular project, and the actual competencies of the actual project participants.

Since many projects involve a single owner, a single contractor, and numerous suppliers, the global assignment of competencies at the project level is useful in establishing a general allocation of responsibilities among the owner, the contractor, and the supplier community. Specific allocations of competencies, however, can be more meaningfully achieved in a system, sub-system, or component context by focusing on the available competencies of the particular supplier(s) involved.

Figure 2a provides a useful means of depicting a three-way distribution of the various competencies utilizing a triangular allocation. Competencies possessed or led exclusively by one of the entities are in the respective corners, while competencies shared between two entities run along one of the sides, and those

13

Alliance/Partnering

Benchmarking/Metrics

Business Development Commissioning/Startup/Performance Testing Conceptual Cost Estimating Constructability Construction Construction Management Convert Research to Project/Scale-Up Defining Facility Requirements * Definitive Cost Estimating

Detail Design Equipment Manufacturing * Environmental/Permits Field Quality Control Financial Approval Legal/Contract Administration Lessons Learned

Maintenance & Operability Performance Guarantee * Planning & Scheduling Preliminary Design/Scope Price a Bid & Build to It * Process/Conceptual Design Procurement Project Controls Project Management Project Management Oversight Proper Equipment Sizing * Risk Management Safety Setting Project Goals Supplier Engineering * Team Building Technical Expertise Total Quality Management

Owner

Owner Competencies Owner/Contractor Owner/Supplier Shared Shared Competencies Competencies Owner/ Contractor/
Owner
Competencies
Owner/Contractor
Owner/Supplier
Shared
Shared
Competencies
Competencies
Owner/
Contractor/
Supplier Shared
Competencies
Supplier/
Contractor
Supplier
Contractor Shared
Competencies
Competencies
Competencies

Contractor

* Competencies added by Research Team

Supplier

Figure 2a. PEpC Competencies and Owner, Contractor, Supplier Competency Distribution

competencies properly shared by all three entities are in the middle. Further, the magnitude of a particular competency, or the magnitude of the role of an entity (supplier, contractor, or owner) delivering or leading one or more competencies can expand or contract according

14

to the particular characteristics of a project and the entity’s capabilities. In an extreme implementation of PEpC, for example, where a project is dominated by a few critical components that will be designed, fabricated and installed by a supplier, the Supplier sub-triangle in Figure 2b could grow, becoming more dominant in the project delivery system, and perhaps displacing, to an appropriate degree, competencies traditionally delivered by the owner or contractor.

traditionally delivered by the owner or contractor. Owner Competencies Contractor Supplier Competencies
Owner Competencies Contractor Supplier Competencies Competencies Figure 2b. Potential Expansion of Competency
Owner
Competencies
Contractor
Supplier
Competencies
Competencies
Figure 2b. Potential Expansion of Competency Delivery Role

15

3

Measuring and Quantifying Its Effects

Measuring the Unimplemented

Although the preliminary research indicated that the PEpC concept offered the potential for significant reductions in project time and cost compared with the traditional EPC process, the research team recognized the need to validate these expectations by measuring and quantifying the effects of applying the model. Because PEpC, however, by definition involved new and fundamental changes to the traditional EPC process, the difficulty of measuring the unimplemented was encountered.

In order to document the expected benefits of PEpC, the research team developed two different measurement processes, one theoretical and one practical, that would permit the measurement of both the expected ultimate potential of PEpC as well as provide practical validation of those expectations based on actual project experiences.

The EPC Model

As a measurement tool, the research team adopted a baseline model of the classic EPC process developed by the CII Information Management Impacts Research Team (See CII Implementation Resource 125-2, Determining the Impact of Process Change on the EPC Process). That model consists of 164 activities, 16 milestones, and 12 major phases commonly found in conventional EPC projects. The model includes a logic diagram that defines the sequence and logic relationships between and among the 164 activities, and includes detailed data defining the associated cost and duration of each activity.

The model can be manipulated to modify any of the activities, sequences, relationships, costs, and durations. Utilizing sophisticated computer modeling software, the research team was able to measure and document the cost and schedule impact of changes to the traditional EPC process.

16

Based on the methodology and definitions established by Information Management Impacts Research Team, the terms cost and time refer to the total costs and total durations of the engineering, procurement, and construction processes, but exclude the cost of procured materials and equipment.

Imagining the Optimum

Selected research team members were asked to envision a full- scale implementation of PEpC in a particular project from their particular industry or background. Each member then individually reconfigured the baseline EPC model to reflect the implementation of the PEpC concept in their particular project environment. This was accomplished by examining each of the 164 activities, reordering them as appropriate, and adjusting the expected costs and durations of each activity. Each member’s modified model was then run through the simulation program to determine the impact on total project time and cost.

The results of 10 such theoretical PEpC implementations indicated that savings ranging from 5.6 percent to 19.6 percent in project duration and from 0.3 percent to 17.8 percent in project cost could be expected from a full-scale implementation of the PEpC concept.

Comparison with the Real World

Next, the research team sought to test these theoretical implementation results against actual field implementations of PEpC. Although no full-scale implementations of PEpC were found (or were even thought to exist), four projects were identified where partial PEpC-like characteristics were implemented. These included:

• A new paper mill for a major paper company.

• A chemical reactor train project for a major chemical company.

• The expansion of a wood chip screening plant for another major paper company.

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• A

new

company.

bottling

line

installation

for

a

major

brewing

In each of the four cases, one or more suppliers of the most critical project components were engaged early in the project and generally in conjunction with or just following preliminary conceptual engineering. In all cases, the suppliers were selected based on expanded selection criteria including their expertise with the components to be installed, their willingness and ability to accept broader contractual responsibilities, and their ability to contribute to overall project objectives rather than low-bid to a detailed specification. In each case the selected suppliers participated in the detail engineering phase of the project, contributing cost and time-saving expertise, information, and suggestions.

The benefits of the application of PEpC-like strategies in the four projects studied indicate cost savings from zero to 6.6 percent, but more significantly, duration savings from 5.6 percent to 18.6 percent. Upon detailed analysis, the difference in the ranges of savings, particularly the time savings, could be attributed to the aggressiveness of the application of PEpC-like innovations.

Measurement Conclusions

Figure 3 compares the cumulative reductions in schedule durations achieved in the theoretical implementations of PEpC against the actual savings achieved in the PEpC-like project applications; with both compared to the baseline of the EPC model. Three conclusions are noteworthy:

1. The savings achieved in the four field implementations have significant correlations to the aggressiveness of the application of PEpC-like concepts.

2. The savings achieved in the field implementations are within or exceed the savings range contemplated in the theoretical, full-scale PEpC implementations.

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19

1

- Preliminary Feasibility

2

- Team Selection

3

- Preliminary Design, Est., & Scope

4

- Estimate, Schedule, & Review

5

- Procure Std. & Spec. Equip.

6

- Procure Fab. & Bulk Materials

7

- Detail Design

8

- Work Packages

9

- Preliminary Construction

10

- Field Construction

11

- Startup

12

- Documentation

Case Study 1 Case Study 2 Case Study 3 Case Study 4 Envelope of Savings
Case Study 1
Case Study 2
Case Study 3
Case Study 4
Envelope of Savings for
Theoretical Implementations
–5
0
5
10
15
20

Figure 3. Range of Time Savings from Theoretical Scenarios Compared to Case Studies

3. In both the theoretical and field implementations, negative savings, i.e., prolonged activity durations, are experienced in the first three or four major phases of a project. These are then recovered and exceeded in a positive fashion in the remaining project phases. This is logically consistent with both the envisioned PEpC concept as well as the frequently quoted CII tenant that the early application of proven beneficial techniques in a project cycle, even though momentarily time-consuming, reap desirable downstream rewards.

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4

Implementation

The Challenge to Change

Little is achieved by simply identifying and defining a new process. Results come from implementing change and achieving the anticipated benefits. PEpC could be superficially dismissed with a, “We already do that.” PEpC as envisioned and documented by the research team, however, is a fundamentally different or breakthrough project delivery system that, by definition, is not in current routine use. Thus leadership and a firm commitment to explore innovative and promising methodologies will be needed to sponsor a PEpC implementation, to overcome the expected barriers, and to learn the important lessons that can only come from real experience.

An Implementation Program

The PEpC concept is an innovative project delivery system that modifies and reorders the sequence of several critical project planning and execution steps of the classic EPC process. For this reason, the implementation of PEpC must begin with and be incorporated into the earliest pre-project planning processes of the project life cycle. Figure 4 illustrates the five elements of the recommended PEpC implementation process and how they relate to the traditional pre- project planning process.

Implementation Steps

Familiarization and Awareness. Because PEpC really is a new and different project delivery system, it will be necessary to ensure that all involved parties — owners, contractors, suppliers and, particularly, members of the project team — are aware of and understand the PEpC concept. They must be informed and understand how it changes the EPC process, re-allocates risks, and re-defines required core competencies.

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Business Plan

Business Plan PEpC Implementation Steps • Familiarization and Awareness • PEpC Strategy Development • PEpC
Business Plan PEpC Implementation Steps • Familiarization and Awareness • PEpC Strategy Development • PEpC
PEpC Implementation Steps • Familiarization and Awareness • PEpC Strategy Development • PEpC Execution Plan
PEpC Implementation Steps
• Familiarization and
Awareness
• PEpC Strategy
Development
• PEpC Execution Plan
• PEpC Supplier
Selection
• PEpC Commitment
Plan • PEpC Supplier Selection • PEpC Commitment Project Execution Plan Product Technical Plan Facility Scope

Project Execution Plan

Product Technical Plan

Facility Scope Plan

Selection • PEpC Commitment Project Execution Plan Product Technical Plan Facility Scope Plan Contract Strategy
Selection • PEpC Commitment Project Execution Plan Product Technical Plan Facility Scope Plan Contract Strategy
Selection • PEpC Commitment Project Execution Plan Product Technical Plan Facility Scope Plan Contract Strategy

Contract Strategy

Figure 4. PEpC Implementation Incorporated into Traditional Pre- Project Planning Phase

PEpC Strategy Development. A common product of the pre- project planning process is the work breakdown structure. For effective PEpC implementation, this breakdown should identify all major project components and systems, which will make it possible to then:

• identify the strategic procurement items and/or systems critical to project success.

• identify members of the initial project team who will lead in the selection and procurement of each strategic procurement item and/or system.

• develop a detailed procurement and contracting strategy suited to each strategic procurement item and/or system.

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• identify possible suppliers with the core competencies required by the unique nature of the project and each strategic procurement item and/or system.

PEpC Execution Plan. The execution plan builds on the previously developed strategy and provides the guidelines and assurances needed to contain risk and proceed with the process. The following steps are required:

• Obtain agreement and commitment to the PEpC strategy from all project stakeholders.

• Establish target cost and time baselines for each of the strategic procurement items and/or systems.

• Define the commercial and contractual terms to be used and define greatest total value criteria for supplier selection.

PEpC Supplier Selection and Award. Supplier selection and award follows on the development of the strategy and the execution plan. The following steps are required:

• Formulate and issue requests for proposals from identified suppliers in a manner that invites and encourages suppliers to offer products and services that provide the greatest total value to the project and maximize the utilization of the suppliers’ core competencies.

• Review proposals relative to the established commercial and contractual terms and evaluation criteria, and interview potential suppliers.

• Discuss and agree on core competencies and ensure that roles and responsibilities are defined.

• Refine and finalize appropriate contracting strategies, and select and engage strategic suppliers.

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Project Team Integration. An effective PEpC implementation requires that owner, contractor, and supplier organizations must be integrated into a single project team. The organizational considerations needed for a successful implementation will require:

• a clear definition of roles and responsibilities.

• a strong focus on team building and acceptance of the fact that firm functional boundaries are less important than project team requirements.

• addressing

and

managing

a

change,

attendant fear and uncertainty.

together

with

its

Selecting the “Big P” Candidates

A pivotal task in implementing PEpC is identifying the strategic or project-critical components or systems that should be procured in advance of principal engineering activities. The characteristics of these components and/or systems would include one or more of the following:

1. System performance depends on a technology that is a core competency of the supplier, or is unique or fast-changing.

2. System performance characteristics vary significantly from supplier to supplier.

3. Delivery

configurations

vary

substantially,

and

there

is

potential for change in configuration.

4. The

system

and

its

associated

components

are

engineered and closely integrated.

highly

5. The system or process is complex and there is substantial potential for simplification or standardization.

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6. Knowledge

system

integration is a supplier core competency.

of

engineering,

configuration,

and

7. Design interfaces between the component or system and other portions of the project are complex, variable, and subject to interpretation.

8. System or component sizing, configuration, and selection are critical to the principal engineering activities.

9. System

or

component

engineering activities.

design

can

influence

principal

10. Lead times for system or component selection, design, and delivery are long with strong dependencies in the overall project schedule.

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5

Recommendations

In concluding its work, the research team offers the following three recommendations.

1. Based on the positive results documented in its study of the PEpC concept, the research team recommends that full-scale implementations of PEpC be undertaken:

the

• in

accordance

with

implementation

guidelines

provided; and

• in instances where suitable champions of innovation can be relied upon to find opportunities rather than barriers, to maximize the benefits to be derived from this promising new approach to project execution.

2. The PEpC concept as presented should be the subject of further measurement, study, and refinement through industry implementations.

3. CII and its member companies should continue to explore, expand, and develop its focus on the supplier community and on enhanced supplier involvement in the capital project delivery process.

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6

Postscript

Is PEpC a Breakthrough?

One might conclude that the suggested reordering of the core elements of the traditional EPC project delivery system would automatically qualify for breakthrough status. In some preliminary presentations of the PEpC concept, however, the research team received a number of “we already do that” reactions. So, at the risk of redundancy, let us review the essential elements of PEpC:

The research concludes that to implement a PEpC project delivery system one must:

• identify the project-critical components in a project prior to all but the most conceptual project engineering; and then

• consummate commercially-complete transactions to engage the most project-favorable suppliers of those components (according to project-specific selection criteria); for the purpose of

• facilitating the delivery of those suppliers’ core competencies into the project delivery process, including the suppliers’ ability to accept broader roles in project execution and risk management; and thereby

• influence, define, and benefit the overall project execution strategy and the detail engineering effort; and

• that

this

process

should

be

undertaken

deliberately, and consistently.

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strategically,

The research team is hesitant to claim that a PEpC approach to a project has never been utilized. Many of the “done that” examples, however, were actually instances of what the research team identified and documented as PEpC-like applications. In fact, the research team utilized a number of these PEpC-like project examples in its measurement and validation process. These were, indeed, innovative variations to the traditional project delivery process and were, in most cases, successful and beneficial in terms of their cost and schedule impact; and the research team infers no diminishment of the innovation and value of these efforts.

The research team, however, found no situations where a PEpC approach as defined above was utilized strategically, deliberately, and consistently (with the possible exception of the Nucor approach documented in CII Research Summary 112-1, 2% Engineering — Can It Work for You?). In many cases where one or more key suppliers or components were selected early, often as a means of providing some anchor points for detailed engineering, or to select a particular proprietary supplier technology, the definitive commercial transactions were concluded later in the process. In other cases, supplier selection arose from the use or re-use of new or pre-existing supplier relationships. Finally, some of the examples of early supplier selection, although beneficial to the detailed engineering effort, were really initiated out of schedule considerations.

Again, all of the PEpC-like applications were valuable and innovative variations of EPC. The research team’s concept of PEpC, however, suggests taking these innovations even further, perhaps to the point where the reaction is “We can’t do that” as opposed to “We already do that,” and to the point that a PEpC concept is commonplace rather than anecdotal.

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So, is PEpC a breakthrough? The research team believes that it is. But that decision is ultimately left to the reader and the reader’s use of this research effort. PEpC is only a breakthrough if it is applied and implemented as a breakthrough and prompts the practitioners of traditional EPC to dramatically change the way suppliers of the most project-critical components are integrated into the project delivery process.

The research team urges the industry to stretch its view of the supplier community, to find ways to maximize suppliers’ contributions to traditional EPC projects, and at the same time, to stretch the supplier community to become more participative in the design and execution of EPC-type projects. The research team believes that a PEpC approach to project delivery is an effective tool in achieving these objectives, and believes that its research documents the benefits such a process delivers.

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References

Sullivan, G. R., Yupari, M. A., and Anderson, S. D., “Owner/Contractor Work Structure: A Process Approach,” A Report to the Construction Industry Institute, Research Report 111-11, Austin, TX, 1997.

Vorster, M. C., “PEpC: A Breakthrough Project Delivery Sytem That Improves Performance by Reforming Owner-Contractor-Supplier Relationships,” A Report to the Construction Industry Institute, Research Report 130-11, Austin, TX, 1998.

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Reforming Supplier Relationships Research Team

Robert J. Anderson, Hoechst Celanese

Gary Beachman, Weyerhaeuser Company

Donald A. Bené, Anheuser-Busch Companies, Inc.

John G. Berra, H. B. Zachry Co.

Larry Cessnun, Hilti Corp.

Robert E. Fielitz, DuPont

Jamie Fowlkes, Rohm and Haas

John E. Futcher, Bechtel Corp.

Philip G. Luzier, Champion International

Frank B. Lynott, Honeywell, Inc.

Mark A. Meek, QuikWater

* Edward M. Ruane, J. A. Jones Construction Co.

James A. Scotti, Brown & Root, Inc.

James E. Steenbergen, Union Carbide Corporation, Chairman

Michael C. Vorster, Virginia Tech

* Principal Author

The Construction Industry Institute The University of Texas at Austin 3208 Red River, Suite 300 Austin, Texas 78705-2650 (512) 471-4319 FAX (512) 499-8101

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Bureau of Engineering Research The University of Texas at Austin

Bureau of Engineering Research The University of Texas at Austin