Paper delivered by Leonard van der Dussen at IRR’s 2nd Annual EPCM Conference
Finding a balance between engineering and commerciality to ensure you have chosen the most appropriate solution for your current needs
What is a “solution”? It is said that war is not a solution, that divorce is not a solution, so what is a “solution” then?
In the project context, it simply refers to the objective of getting the job done. If however the job is done such that the process does not fully deliver, or is late or the project is over budget, the solution is incomplete – a bit like the divorce: something is functioning better than it was before, but the legacy impairs on the enjoyment and thus the measure of success of the outcome.
If it is assumed that engineering and commerciality is opposed in its offerings on how to solve a problem – or address a challenge, to be more PC (politically correct) – then the solution would be in finding the balance between engineering and the process beauty it can produce, and the commerciality, in all its callous pecuniary objectives.
This paper is not a scientific study, but rather a practical, experience based sharing of thoughts on a subject which does not have clear answers: the variables are simply too many to try to pin it down to some graph with breakeven points.
Considering that procurement and other commercial models depends heavily upon those invididuals executing it, it is even more clear that empirical statements are to be carefully avoided.
The discussions here focus on how to achieve a working plant, with only partial reference to the cost optimisation. Cost and commercial are too often used almost as synonyms and we wish to avoid that pitfall while discussing the far more involved topic of commercial execution to achieve the outcome made possible by engineering for long-term gain by production.
Most projects are hardnosed efforts at obtaining profits from hard-raised money, whether self-funded or leveraged. There are few architectural pet projects and even less engineering projects being done with money-to-spare and thus not so much interested in optimisation and efficiency.
Consider the interaction between engineering and commercial when a heart transplant is contemplated: it is hard to think that it would for example be put out to competitive tender on lowest cost basis. In fact, it is obvious that quality and in the second place, skills and other resource availability would by far outweigh cost.
Give a thought to the astronaut asking his partner as the launch countdown is in progress, whether he knew that they are sitting on $3 billion dollars of lowest tender?
These extreme cases are fortunately not so directly applicable to the majority of engineering projects, which most often are not necessarily life threatening or a single operation (like the rocket launch) with all or nothing attributes. Most engineering projects can be tweaked and where necessary, even re-engineered and re-constructed to eventually get it to work.
In the end it would please the engineer, but the additional costs and time lost, which means product and income lost, is obviously commercial disaster.
What is the engineer’s objective? Probably the most efficient and elegant process with the highest availability and low maintenance; and if possible some new edge that makes it better and is recognised as innovative and better than before.
The commercial manager in turn would like a project running within budget, on time in which accountabilities and responsibilities are clear and can be addressed without cumbersome analysis, consultants and correspondence; at first glance, this means that it would be preferred to deal with as few parties as possible (limit the number of contracts) and let others worry about getting it to work; and if the engineer put something on the drawings that has been built and run before, and for which contractors and experienced personnel to get it up and running are in abundant supply, even better.
The extremes of war presents cases of engineering needs, executed within the needs of being immediately required and where often budgets are negated. While being trained in the South African Corps of Engineers when years ago many of us spent two years in military service, there were lectures of rather refined calculations and considerations in how to get a bridge to fall down by applying an optimised quantity of explosives at the structural engineering selected points. After days of learning to understand the explosives, the calculations, the logistics and operational issues a sergeant who really had seen action on the front concluded the last session: “Write your tests, get your stripes or pips or whatever, but then forget all this”, he said. “When you are out there, the bridge has to go down NOW, thus you load two Samil 20’s with ten cases each of PE4 (the explosives), set up the detonators, park the two trucks on the bridge, run like the wind and detonate. Bridge gone, mission accomplished.” Not elegant, not cost efficient, but highly effective if the enemy was closing in on the bridge and the knowledgeable engineer with the qualifications and calculations was yet to arrive; and yet to do the sums; and consider the time and exposure of the sappers in absailing mode under the bridge to place the optimised small deposits of explosives at those delicate spots in the specified arrangement.
Think of skills shortages in engineering, and this approach for all its crudeness, has a certain appeal from an EPCM perspective to maybe get the practical and experienced fabricator/constructor in NOW, while the detailed design of the structure is still being developed, select the next larger structural element when in doubt and start constructing. Maybe a bit more capital wasted in the columns gets the process running to catch the season or the bull run in the product price.
That does not imply that the calculated, well-designed and elegant engineering solution is not necessary. In fact, planning and refinement is usually better, and leads to better view of the project and enables better procurement execution as well.
Another interaction between engineering and commercial is the process guarantee: the piece of paper may be as legally sturdy as can be, and can enable the downfall and vengeance on the one-stop contractor who can not make the plant work: but does it get the plant to work? This is a crucial concept to understand when the commercial decisions on balancing the desire to limit the number of commercial packages with the old-fashioned warning of not placing all your eggs in one basket. The process guarantee is usually a valuable tool in risk management and enforcing results, but its mere existence does not guarantee results. It is the commercially sound selection of the appropriately sized and scoped package, through a good tendering or other solicitation process to select the most suitable party to excecute the works with the realistic ability to back it up, that leads to success.
It sounds like such simple common sense, but can it be repeated often enough that getting the procurement right in the first place, is far more valuable than all the backstops that the best legal minds can devise, once things have gone wrong?
The following factors should influence the decision on the commercialisation of the proposed engineering project:
Realism and not perceptions must rule when devising the commercial plan to provide the solution to get the engineering solution up and running. It is sad that perceptions and over-optimism often plays a too strong role in the compilation of the commercial plan.
It has been indicated that there is no hard and fast rule in how to balance the engineering solution and the commercial solution. It is justified though to describe an outline on the thinking process and samples of how to arrive at the best solutions.
Firstly the essence of the project must be identified: the core characteristics without which the project does not exist. Consider one aspect as an example: how to decide the most appropriate tender invitation list.
Is this project primarily an engineering and design challenge, but once designed, easy to construct? Or are the layouts, flows and shapes well-known, but the sheer height of the tower required presents the challenge, or we need the best riggers and boilermakers to assemble the intricate support structure for all the screens and chutes in a compact flow design first time right?
If it is assumed that a single entity contract is desired by the client, then an early decision must be made whether the contractor is to be an excellent engineering company, that will tie up with (internally or externally) a constructor, or should the excellent constructors be approached and they be requested to seek an engineering capability to offer their combined services?
The quest for seeking the best solution, requires harsh realism about the capabilities and the proportion of fit-for-this-project that particalur parties may have. In the current (2009) downturn environment, we are already seeing a tendency of Joe-needs-work and thus Joe must be on the tender list, and on the other end, some hard-nosed entity that actually is the best in performing this particular difficult work, is overlooked because I (not necessarily the client or the project and its total team) had a bad experience with them.
Consider the situation with pressure vessels, or specialised steel pressure piping: there might be a welder or two in the one company that according to urban legend are very good welders, but they do not have the tested capability for specialised welding. Sentiment and the single entity temptation may prompt a single contract with the steel, plate and piping fabricator, but engineering realism may show the need to take out the pressure items and place a separate contract for it, and accept the interface management that results.
The speciality content of the project must be determined: if a project has significant portions of machined parts or exotic materials, those must be procured and managed as close as possible to the source, to clean the path for accountability and effective guarantee management.
The engineer must also be approached to contribute if some exotics can be engineered out or machining made easier.
A project in which a laboratory process with extreme acids was industrialised from a manual process to a tripled production in a remote-controlled and partially automated process, required many specialised materials and the experienced installers for it. Rare plastics, lined piping, instruments selected to work within the acid environment, special pumps, special valves – process vessels fabricated from polypropylene.
The project was driven towards a client desire for single contracting, in the assumption that for the very reason of the challenges, a single entity should be responsible and accountable. There are no engineering companies in South Africa with the full skills mix and real experience of the acids, mechanicals, laboratory and research type processing (where accuracies in materials handling are exceedingly more important than in a product environment). A company with excellent credentials in petrochemical engineering, design and management was selected.
Then: the process vessels were designed as if made from steel (the design engineer’s point of reference), the plastics contractor was silenced when they objected – fourteen months later twenty-four expensive vessels had to be replaced, this time with an appropriate sheet plastic utilisation design and not tubular legs.
Production type steam class valves were specified (and subsequently procured) as isolation valves to solenoid valve junction boxes serving the multitude of small air-driven laboratory scale valves that required only piffs of air. The steam class valves could not be fitted for sheer size issues, and ball valves purchased at the local hardware store for 0,6% of the cost of the specified valves did the job. The process valves in the process itself were extremely important, but the engineer did not see that the isolation valves in the services side were less critical, easy to maintain and of simple manual open/close nature with open default and closed only during maintenance.
The gap between the data sheet claims of instruments and what ensued in the plant, was a topic on its own. In short it underlined that guarantees on paper has limited effect in the plant, and that specialities must be carefully contracted as directly as possible with the best party.
The one success in this project were the control valves, which were commercially separated from the main EPCM contract: specified by and procured in close co-operation with suppliers who in part engineered plants using those specific acids and with experience of the small laboratory type dosings that were required.
The project manager must take a strong and realistic stand on three aspects when deciding the commercial solution:
3. Guarantee potential (can this process be guaranteed?) in relation to uniqueness
These aspects are crucial to decide the balance between integration and addressing specialities, which is the core balancing act from which the rest of the procurement and commercial model formulation follows.
The concept of flexibility must be mentioned: if the engineering solution presents complexity and uniqueness, one of the risk mitigation methods is to retain flexibility. It applies to involving more different parties in direct relation to the client, with gives the client opportunities to move work around, and avoids having all eggs in one basket. If one party fails to meet expectations, the entire project is not immediately at risk.
The other element of flexibility has even more potential: whilst there are pitfalls for commercial to feed back into engineering and design, the question must be asked whether engineering can perhaps offer alternatives to the complexity and/or uniqueness that the elegant, process-efficient and exciting engineering solution presents.
Both sides, engineering and commercial, must continuously seek flexibility in the solutions to counter the uncertainty inherent to projects.
The requirement: a place to live for two.
The solutions table, comparing engineering and commercial:
|Tent||Off the shelf solution, thus procure as single package and simplicity means that client can do erection without need for further project involvement (provided procurement ensures that the manuals and guarantees are delivered with the goods). Proposed model: single purchase of goods|
|Simple brick house||Not unique or complex, and under well-known legislative and specification requirements, thus appoint constructor directly since the project is essentially a construction challenge; keep project management and consultant costs down since the project is small enough to be managed without continuous analysis and reporting tools. Proposed model: single contract with reputable constructor|
|Suburban middle-class house||As previous, but: the kitchen allowance and selection in the project now requires managed steps, a good outline and needs (in case of married couple, wife’s wants) statement; the bathrooms will require similar considerations and must be dealt with to the extent of being standard or more involved. Layout and design, future expansion considerations becomes involved, all indicating that an architect may be a good selection to lead the project. Since it is still between standard and unique, a good constructor with the right attitude and using a bit of design and draughting assistance, may still be a suitable choice. The kitchen may be an area for separate contracting, depending on integration complexities and the owner’s and/or architect’s time and willingness to deal with it. Proposed model: contract reputable constructor, with separate contract for kitchen fitout|
|Upmarket secured residential development showhouse||More than likely double-storey and/or against the hillside, thus engineering requirements becomes separate consideration alongside architectural design. The double volume portal entrance and other civil engineering require dedicated design and supervision. The higher costs of fit-outs such as kitchen, bathroom, electronic networking, high-end light fittings and potentially some glass facades and/or designer stairs may warrant separate contracts to avoid mark-ups on all of this. The high-end requirements require specialists anyway, and the interfaces are realistically manageable if the architect’s and engineers’ design quality is appropriate. Proposed model: “EPCM”|
|Cliffhanger in Camps Bay||As for the upmarket showhouse, but given the construction risks and civil speciality costs which outweighs fitouts costs, as well as the client probably being in a financial position where his own attention is better spent on his core business, a lump sum turnkey solution with single accountability may be a more suitable selection.|
The simplicity of a client engaging one party to provide him with the total working solution is appealing. It could minimise the client’s internal and opportunity cost to obtain the desired engineering solution and there is no doubt about the accountability for the end product producing to requirement.
The risk in this simple model is unfortunately equally simple and all encompassing: if the one executor fails, the project fails. Such failure could result from different reasons, e g although the executor has a good track record of such plants, skills shortages and work overload cause failure, but it could also be a failed commercial process which did not identify the essence of the project correctly, and for all the speed and agility that a Formula 1 car presents on the right track, it would fail miserably in the Lesotho challenge.
Honest realism and experience in identifying and describing the essence of a proposed project upfront, is the key to balance engineering solution with commercial solution.
The same honest realism is required from the engineering side, that if there is a solution that is perhaps less exciting, but more executable, then engineering must change if the commercialisation appears to be too risky for the complex and/or unique solution.
If a simple shed is required, then commercial should not try to demontrate its modern and intricate capabilities of structuring the project contracting and finances on it. If however a nuclear reactor is to be constructed, the commercial sophistication is exactly what is required.
If both engineering and commercial avoids being a goal in itself, the first step towards project success is achieved at the onset.
LJ VAN DER DUSSEN