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Managing Large EPC Projects in India
Dr Reinhart Vogel, Managing Director of Linde Engineering India, shares his perception on ‘Managing large EPC projects in India’ with particular focus on the hydrocarbon process industry. Dr Vogel is of opinion that Investments in this segment are currently dominated by expansions of refineries and their integration with downstream petrochemicals, LNG regasification terminals and petcoke gasification. On longer terms, investments will be seen in ammonia/urea, olefin and polyolefin, coal gasification and CTx as well as utilisation of C2+ separated from shale gas.

Rising challenges and competition of the EPC Industry in India is not hidden. The industrial scenario is not in favour for the larger EPC service providers due to various reasons, one of which is the limited number of projects available in India. Some factors delaying the project implementation are weak economic indicators, policy uncertainties, lack of clearances and high cost of financing. However, it is expected that the government of India is initiating further changes to policies and subsidy schemes which will attract in future investments in critical industrial areas.

EPC Contractors in India: On the side of EPC providers a massive build-up of resources has been witnessed in the country. New players have entered the market including international EPC contractors, establishing their local/divisional offices in India. As a matter of fact, there is a deficit of demand over supply in the EPC industry in India. The actual number of projects available in India is not sufficient enough to fully utilise the established capacities of all the EPC providers of the country. Over and above this, the operational model of the EPC industry is still facing acceptance problems in India, where a significant number of projects are executed in the ÂconventionalÊ mode, ie, the engineering is separated from procurement and construction.

A holistic approach to this scenario confirms that a LSTK/EPC strategy for execution is one of the best ways for the owner/client which serves promising results and the execution of their plant/facilities within time and budget with a single point responsibility. However, off-late it is noticed that due to the entry of several EPC players the bidding process of the projects has become very aggressive and the projects are awarded at a very low cost, sometimes even way below the clientÊs budget. These unworkable costs are leading to severe constraints for resource mobilisation and ultimately the project schedules and quality are getting affected.

The present scenario calls for an in-depth analysis of how the stake holders: ie, the owners/clients, the PMCs and the EPC contractors respond and what are the possible strategies to deal with prevailing risks during project development and execution.

Pre-award Phase: During the phases of project development by the owners/ clients and bidding by EPC contractors, it is important to generate realistic budgets and to develop a sound execution strategy to meet the completion requirements of the project. To understand the base cost of the project a careful bottom-up cost estimate for procured items as well as for contracted services including various risks associated with the project is required. Each EPC contractor will have to develop its strategy for detailed project cost estimate and to benchmark the obtained results against executed projects.

In quest of bringing down costs the owner must not try to shift all risks through ITB to the EPC contractors. Rather the risks must be addressed genuinely so that the estimated budgets of the owner remain workable and no EPC contract should be awarded below certain cut-off levels of client budget or estimates. Otherwise, the situation may lead to non-workable prices and the project suffers with regard to all parameters.

During the bidding process the EPC contractors are often considering bid partnerships with vendors of equipment and materials as well as with contractors for construction services. The intention of bid partnerships is the early commitment of prices in order to reduce the contingencies on account of unknown price development.

Another focal area in the proposal phase is the generation of a detailed project schedule. Under normal circumstances the project schedule will be construction driven to meet the overall completion deadline. A careful schedule analysis helps in identifying the critical path of the project and delivers important input for the project risk analysis. The project risk analysis is generated to identify execution risks and to value them individually in order to generate substantiated provisions, ie, the contingencies.

The project cost estimate and the project schedule shall be supported by a detailed project execution concept. This concept shall describe the strategies to be applied in the different phases of the project (engineering, procurement and construction) in sufficient detail, to meet the identified budget and to deliver within committed schedule. Strategies to mitigate the identified risks play a vital role and must be included in the project execution concept.

Diligent implementation of the foresaid strategies leads the EPC contractor to submit confidently a substantiated bid with realistic budgets and execution schedule. Further, sufficient details and structured documentation are established in order to serve the project manager with required information for a seamless and successful transition from proposal phase to project execution - should the client accept the bid of the EPC contractor.

Project Management: An essential role during project execution is project management, which we would foster into highlighting some important activities in the context of risk mitigation strategies. First and foremost being the generation and freeze of the baseline schedule for which client approval shall be obtained. The baseline schedule shall clearly define client obligations (what and when; eg handover of cleared site, provision of utilities, etc) and shall be supported by a schedule basis memorandum describing important assumptions made for the generation of the schedule.

The approved baseline schedule is not only a fundamental tool to steer the project within the organisation of the EPC contractor but is also essential when consequences of changes have to be evaluated. A change event in a project may lead to cost and/or schedule consequences and the latter can be evaluated and substantiated only if the baseline schedule and regular schedule updates are available to EPC contractor and client. In respect to changes to the project scope or schedule a frequently seen mistake during project execution is the late notification of a change event and the late determination and documentation of its impact on time and cost.

A further important activity is the billing schedule which ideally targets a cash positive or cash neutral project execution. As the approval of the billing schedule is often a precondition for submission of first invoices, due attention should be given to this activity.

Some efficient techniques and practices followed by project management and higher management for execution of large EPC projects are:
1. Nomination of Direct Responsible Individuals (DRIs)
2. High Frequency Reviews
3. Drill down approach during reviews - go to 50 feet level; do not stay at 5,000 feet only.

In the execution phase it is essential to be precise in crucial decisions and move forward to actualise the plans rather than spending excessive time in exploring alternatives or going into R&D, as the EPC projects have predefined boundaries of project time, cost, quality and critical parameters regarding plant performance.

Another most important factor is keeping all stakeholders well informed about project health at all stages and seek support when needed from the owners, PMCs, local authorities and any other involved parties to add value to the overall project execution programme and its goals.

Engineering: Early in the engineering phase a document delivery schedule shall be developed which supports the project baseline schedule. This would enable manpower as well as resources planning. In case the available in house resources are not sufficient to support the project execution, utilisation of contracted resources shall be considered, as a compromise on project schedule due to resource constraints would not be desirable.

A significant challenge for the project management in this phase is the coordination of the interfaces between various engineering disciplines as well as between engineering, procurement and construction. In order to manage this challenge the project manager shall have the full understanding of required workflows and processes and has to align these with the schedule requirements.

Major focus areas during engineering are speed and quality of engineering deliverables. Hidden defects in engineering can prove extremely expensive to rectify if identified at a late stage of the project. Delays in engineering shall be avoided by all means as this will have a knock-on-effect on the further project execution schedule. Also, delay recovery in engineering can be easily handled compared to recovery of delays in fabrication or construction. An established culture of fair reporting of problems, either technical or relating to project schedules, within the EPC organisation enables the project manager to initiate corrective actions right in time.

In most cases the entire project schedule will be driven by construction, hence, early freeze of the plant layout is essential. The approved layout, completion of required safety studies and review and approval of the 30 per cent model are preconditions to issue foundation drawings and allow civil construction at site to commence. In cases where piling is required some advanced drawings and calculations shall be generated to allow start of piling works even based on approved layout and before completion of the 30 per cent model review.

Clients often involve a dedicated PMC to support with project implementation. In order to speed up the generation of approved drawings and documents a discussion and approval with the PMC across the table is an ideal practise. This helps to shorten the review cycle significantly and cuts down the number of iterations to the bare minimum.

Procurement: The procurement phase starts almost in parallel to the engineering phase and the bid partnership agreements from the proposal phase (if any) should be converted into executable orders as early as possible to allow vendor and EPC contractor safe planning of order execution. Recently, it is observed that Indian vendors are becoming increasingly competitive as compared to vendors of China and Korea. However, the challenge remains to obtain bids, drawings and the final goods in scheduled time. To stay within the challenging project schedule, potential vendors shall be selected carefully and credit/preference should be given to those meticulous vendors for whom the EPC contractor is confident and expects timely delivery.

A strict follow up with vendors already in the bidding phase (bid expediting) is essential to place orders at planned dates. Similarly the engineering departments of the EPC contractor have to be pushed for bid evaluation and technical clarifications with vendors. If an approval of the technical bid evaluation by client or PMC is required then it should be obtained without any unnecessary delay; the method of clarifications across the table has been the most successful strategy always.

When it comes to the selection of the successful vendors, the process of reverse auction for well defined packages is proved excellent, as this is a fair, transparent and faster bidding process concluding normally the lowest prices.

As a final remark on procurement phase of any project, the EPC contractor should never try to cut cost on expediting and inspection of Indian and overseas vendors. A delay in supply of equipment and materials either because of slow fabrication or on account of quality problems can later disrupt the construction process and may cause serious delays in completion of the plant.

Construction: In respect to construction very often the budgets available with the EPC contractor are too tight to engage large, powerful construction companies serving all disciplines of construction under one roof. As a consequence, most EPC contractors are breaking down the construction scope into smaller packages and award them to multiple contractors at lower cost (lower unit rates). An immediate outcome to this strategy is that it increases the flexibility to re allocate construction scope, if one of the contractors does not perform as expected.

Yet, it cannot be overlooked that smaller construction companies offer some weaknesses such as insufficient cash stability, limited access to qualified manpower, non availability of larger construction equipment, tendency to cut cost, etc.

As mitigation the EPC contractors shall consider the provision of larger construction equipment as well as construction materials as free issue material to construction contractors and shall further ensure that they are not running out of cash to facilitate their expenditures. Consideration shall also be given to the provision of scaffolding under separate and direct contract as construction contractors tend to cut cost on scaffolding resulting in compromises in safety and access.

It is strongly recommended to award the construction contract as early as reasonably possible so that the contractor can carefully plan its work and mobilise efficiently, as the time required for this is frequently underestimated. At the same time, the EPC contractor should not completely rely on the contractors scheduling capabilities; instead, the EPC contractor is required to generate its own resource loaded construction schedule, determining the required resources for direct labour, supervision and construction equipment to satisfy the required production rates for meeting schedules.

We have also experienced deficiencies in contractorÊs ability to manage warehouses and material flows. Hence, it is advisable to keep material management and warehousing under direct control of the EPC contractor.

The warehousing shall be supported by a powerful material management/spool management system populated with all required engineering data and material supply information.

Utmost attempts shall be made to close the construction ground before mechanical erection starts. This increases safety, access and construction efficiency. In this regard a common mistake is to underestimate the time and efforts required for installation and testing of underground piping including related shafts and catch basins. The underground piping systems need preferential treatment during engineering and procurement in order to supply documents and material to site on time. With thorough planning and special efforts the underground piping shall be completed along with the foundations in the construction areas allowing completion of paving before other erection activities commence.

Technological structures shall be erected including the equipment located in this structure. Further, these structures shall be fitted with handrails and grating before piping installation starts as this enhances safety as well as provides easy access resulting in improved construction efficiency. Similarly, the completion of staircases shall be given priority to provide the crews easy and safe access to their workplaces. The progress on domestic construction sites is hampered at certain times; eg during monsoon or during festive seasons. It is important to consider this predictable loss of productivity during such times while developing the resource loaded construction schedule.

One more area which needs to be critically addressed especially for brown field projects is the cumbersome entry process in existing premises of client for construction manpower, tools and tackles and project material which is invariably highly restricted and not given priority as required to meet the project schedule. This must be reviewed and streamlined otherwise 15-20 per cent productive time is lost in arranging the necessary resources and procedures. Besides time loss, it also demotivates the construction team as they face these hurdles almost on daily basis.

Despite of all careful planning delays during construction may appear on various grounds. In such cases it is important to ramp-up manpower and construction equipment quickly in order to recover these delays as early as possible. Having multiple contractors working at one site offers more opportunities for the EPC contractor to obtain additional resources or to re-allocate construction scope. Another proven method to support recovery of delays are target bound incentive schemes for the contractors, however, these will have to be implemented with care to avoid compromises on safety while pushing for progress.

During times of delay recovery the site shall try to use full daylight hours, ie, start the site work early in the morning which in India is comparatively difficult to implement than at sites in Middle East. In general, working at night comes with safety concerns and with reduced efficiency if implemented for all construction disciplines.

However, particular activities such as NDT testing or welding of already tack welded piping connections are relatively easy to implement and to control. In such cases proper general lighting as well as sufficient workplace lighting is mandatory to ensure safe operation of the site at night.

When the construction site nears completion the quality and completion documentation become an issue in respect of timely generation at required quality. For an EPC contractor it is highly recommended to keep the generation of test packs and other quality documents under tight control or under own management.

The efforts and work required to establish completion documentation shall never be underestimated and larger projects make it mandatory to have a proper IT supported completion management and turnover system in place, which is supported by a powerful document management system. As Summary we found that the Indian environment for large projects in the hydrocarbon process industry provides several challenges to the EPC service providers.

However, with careful planning through all the phases of the project, from proposal to completion and with due consideration of at least the described risk mitigation measures, the EPC contractors shall be able to execute the projects within their budgets and time.