Chartered Institute of

Purchasing & Supply

Procurement and Major Capital Engineering Projects

20 February 2014

Introduction

Peter Breen

• Nuclear experience with NNB, HNP, BNG, Centrica and Exelon

• Procurement & Commercial experience e.g. Olympics, EPC, AE

• International experience of major regulated projects

• Faithful+Gould Board Director

• Faithful+Gould is part of Atkins Group of Companies

Peter.breen@fgould.com

Tel +44 (0)1925 238 576

Mobile +44 (0)7720 941 750

Atkins

Features of Major Engineering Projects

• Value - £100M to £10+Bn

• Very complex from a technical, delivery and commercial points of view

• Important investments from a national point of view

• Contracts that have a term greater than 5 years

• Procurement may well involve a long term service agreement to maintain the plant

• Resource availability to design, manage, construct, commission can be an issue

• High contract values give issues with payment mechanism and cash-flow management

Certainty of outcome is key to the Parties

Project Life Cycles

Business

Planning

Facility

Planning

Project

Execution

Plan

Project

Delivery

Start-up &

Operate

Engineering

Business

Business Objectives

User Requirement Statements

Interface

Strategies:

Schedule

Estimate

Procurement

Procurement Strategy

• Scope definition – Technology, programme and key execution criteria

• Supply chain capabilities

• Timescales to procure

• Terms & Conditions

• Procedures to be followed eg OJEU

• Single source approval

• Governance and authorisation of work scope

• Award criteria

• Multiple contractor frameworks with either mini competitions for scope packages, or awarded

based upon performance

• Negotiation strategy

• Payment mechanism including use of incentives

• Risk allocation

• Locations of work

• Procurement Team identity

• Route to Contract

Strategy – Written, Approved & Communicated

Route to Contract

Procurement

Strategy

Request for

Information

Dialogue

Negotiation

Request for

Quotation

Early Design / Works

Agreement

Revised Offer(s)

Final

Negotiations Contract Award

Project specific pre-qualification?

How many bidders?

Selection of Preferred Bidder(s)

How many EDA or EWA?

Scope

Scope drives

budget &

Programme

Unique

Components

Options Employer’s

Capability

Magnitude of

Quantities

First of a kind

Long Term

Service

Agreement

Certainty of Outcome

Employer:

• Cost, time, quality

• Compliance

• Reputation protected

• Minimal cost to prove business case and

authorise project.

• Transparency

• Guarantees on performance, availability and

delivery

Contractor:

• Profit

• Risk minimisation

• Freedom to get on with the project.

• Opportunities for Change Orders

Division of Responsibilities

Technical, Project Management, Project Control (Estimating,

Risk, programme); Quality, Safety, Environment, Occupational

Health; Finance, Construction, Commissioning; Operations,

Insurance, Treasury, Business case; legal

Who is doing What and When?

Subject Matter Experts

Procurement

Contractors

Vendors

Suppliers

Procurement acts as the interface with Contractors Suppliers

and a check on the completeness of the requirements

Risks

• Limits of Liability

• Level of damages for delay,

performance or availability

• Contractors seek to minimise

• Sub-contractors cannot provide level of

securities & guarantees

The Difficult Discussions

Employer Control & Influences

Subcontractors:

• Main contractor to be liable for his subcontractors

• Selection, capability, financial robustness, T&Cs, guarantees, inspection

• Withdrawal of acceptance

Intellectual Property:

• Background IP brought by the Contractor / supplier

• Employer’s knowledge of the process / operation.

Programme / Schedule:

• Visibility of a resource loaded schedule at right level of detail

Employer Obligations:

• Resources to administer the contract

• Timely input of interfaces.

Partnering & Alliance

Benefits:

• Faster / Safer / Cheaper / quality assured

• Opportunity to share benefits for the key project criteria

Concerns:

• Need sustained capex

• Lack of attention after the honeymoon

• May suppress profit levels

• When to apply incentives

Success

• Complimentary strategies

• Manufactures can become service providers

• Opportunity for common shareholding

• Opportunity to roll out in multiple locations

Commercial

• Payment mechanism over long contract term

• Retention

• Bonds and availability

• PCG asset based

• Financial robustness of subcontractors

• Currency risk

• Transparency of cost base

• Reasonableness of profit

Lessons Learnt...

Learning to Date

1. Procurement function can drive projects at times to consolidate requirements for ITT

2. Location – technology – supply chain test

3. Contractors are reluctant for the Employer to have transparency

4. Ultimately the Employer carries the risk

5. Major projects need early, proactive and collaborative action by Owners, vendors, contractors, the

workforce, unions and Governments

6. Big projects move slowly due to the need for certainty

7. Contractor power is shifting as the supply chain consolidates

8. Oil & Gas project drive the major EPC organisations

9. Contractors seek early engagement to influence the price and programme

10. Security of information

11. Executive relationships are essential

12. Clarify the design standards and the ability of the contractor to comply with

13. Clarify who does the design and has responsibility

Learning to Date

14. Quality roles and responsibilities:

- Right to reject, approve QP, audit subcontractors, inspect

15. Logistics, location and IT

16. People make it happen – then they change.

17. JVs may not have a track record

• Whose procedures? Members follow their own

• Can one partner take the lead and subcontract

• JV partners fall out

18. Compliance paperwork must not be underestimated

19. Big projects requirement more openness, cooperation and trust

20. Contractors need to understand the procurement process to commit to the bidding process

Instil good behaviour and attitude within the project team to respect the budget.

Learning to Date

21. There needs to be a robust economic business case for developing major projects.

22. The cost to develop a scheme to full authorisation is expensive to the Employer.

23. Do not under estimate the impact on the Owner of resources needed to develop a scheme, select a

contractor while interfacing with Regulators, Permits and Government.

24. Develop a clear procurement strategy with roadmap route to contract

25. Maintain competition between contractors for as long as possible.

26. Establish Early Contractor Involvement with the Preferred Bidders to develop designs.

27. Clarify the in country regulatory requirements

28. Selecting Most Economically Advantageous Tender needs to be underpinned with a strong risk management

process.

Learning to Date

29. Having robust contracting arrangements are essential as are those that adopt contracting strategies that

promote constructive relationships, rather than adversarial ones, between parties.

30. Contractors’ willingness to take on Risk is limited.

31. Contract negotiations with vendors and delivery teams are protracted.

32. The bidding costs are expensive to the supply chain who fear projects that do not go ahead.

33. Security of information is imperative.

34. Provide a central team location with good IT.

35. Owners need to take the lead - the costs of project risk rest with the Owner. Their leadership is critical to

success and it is Owners that should ensure that best practice is used on their projects.

36. Use integrated project teams from the start of the project.

37. Allow sufficient time and resources for planning and engineering design and for appointing contractors

based primarily on competency. Supplement Owner team with industry experts.

38. Recognise the shortage of good supervisory staff and particular skilled staff – welders, planners, project

managers and engineering designers – develop proposals to mitigate.

39. Contractors get rich on change orders

Thank You...

Peter Breen

Director

Faithful+Gould