2017

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Deconstructing Risk

Tips to reduce procurement risks in projects

by Ashwani Kumar Khare

An engineering, procurement and construction (EPC) project is designed to transfer risk from clients to their contractors despite clients’ exposure to indirect risks, such as project delays, commissioning failures or significant operational issues. In EPC projects, construction or engineering contractors implement the project’s design, procure needed equipment and materials, and construct a client’s asset or facility.1

Project complexity and aggressive schedules require EPC contractors to include sufficient project contingencies in their lump-sum prices to cover potential estimation errors, price escalation, productivity losses, delays and other project risks. When highly competitive bidding occurs, there is increased potential for underquoting to secure the contract.

Overcoming the risks

Procurement is the area where contractors spend the most money, and it’s also where substantial cost savings can be realized if things go wrong elsewhere due to competitive bidding. To meet unplanned overexpenditures incurred in design or construction, EPC contractors will try to cut expenses on procured items, often promoting their preferred vendors to keep project timelines on track. Clients, however, must be careful that this does not affect product quality. To overcome this procurement risk, a client’s management team should consider these 10 points in the procurement process.

  1. Provide a robust front-end engineering design (FEED) definition of your requirements. Open, missing or ambiguous requirements should be minimized. Generally, the end users of the equipment, project management engineers and FEED consultants should collaborate to prepare detailed and clearly written requirements.
  2. The project management team (PMT) must set up and audit its review and approval processes during procurement. The processes should cover the entire supply chain, the review process, interface management (identifying, monitoring and recoding project interfaces), change management (managing project requirement changes) and responses to technical queries raised by the EPC contractor or specification-concession management.
  3. Review and implement lessons learned from previous projects.
  4. Ensure EPC procurement engineering deliverables are reviewed thoroughly, and consult actively with the end user and subject matter experts (SME).
  5. Establish equipment criticality ratings and pay attention to factors such as process safety, and manufacturing and inspection complexities. Criticality also should be established for equipment’s key components and subassemblies.
  6. Review technical bid evaluation (TBE) reports. Check a vendor’s recent performance on similar equipment, and involve the end user and SMEs in TBE approval.
  7. Define your purchase order inspection strategy:
    • Identify quality risks in critical purchase orders, and involve the PMT and SMEs.
    • Create a procurement management subgroup in the PMT, and assign accountability within the team for packaged or bulk items.
    • Decide on the extent of inspection to be conducted by a third-party inspection agency (TPIA). Organizations must understand that TPIA business models have changed significantly in last two decades. They no longer have skilled, in-house resources to conduct inspections, and most TPIAs now hire freelance inspectors who may not be competent or provide reliable inspections.
    • Determine what must be directly inspected by the customer. Organizations can consider posting a few in-house expert engineers at key locations where the majority of procurement manufacturing will take place. This must be subjected to a cost and benefit analysis conducted by the PMT.
    • Judiciously review inspection and test plans to address quality risks.
    • Monitor main vendor outsourcing activities closely, and identify additional quality risks.
    • Plan in advance and prioritize the audits by risks.
  8. Ensure critical vendor documents are reviewed by the customer. Involve the end user and SMEs in the review or approval of key vendor documents. It’s crucial for all involved parties that stakeholders ensure a timely turnaround of these approvals. Delays affect a project schedule and vendor’s budget, as well as overall quality. Vendors that are forced to shorten manufacturing time could compromise product quality to meet delivery deadlines and budgets.
  9. Promptly share vendor-related incidents that affect product or service quality with other involved projects.
  10. Ensure a product is preserved well during shipment and storage until it’s commissioned.

Reference

  1. "EPC—Engineering Procurement Construction," EPCengineer.com, http://tinyurl.com/epcengineer.

Ashwani Kumar Khare is a project quality assurance advisor at the Abu Dhabi Marine Operating Co. in the United Arab Emirates. He has a bachelor’s degree in mechanical engineering from the Indian Institute of Technology Kanpur in India. A senior member, Khare is an ASQ-certified manager of quality/organizational excellence and a certified project management professional from the Project Management Institute.


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