Engineering Cost Escalations Project Report.pdf

7/28/2019 Engineering Cost Escalations Project Report.pdf

1/106

ACKNOWLEDGEMENT

For the tremendous support and interest I received in carrying out this dissertation

project, I would to extend my sincere and profound gratitude to all the participants those

who have actively participated and contributed in the completion of this research project

and its report which is prepared in partial fulfillment of Executive Masters in Business

Administration (EMBA)-Operations.

My particular thanks go to our Dean Dr. Balakrishna Grandhi and Prof. Krishnan

Navgath for extending their kind support. I would also like to thank Mr. Nihar Kumthekar

for providing valuable guidance.

I also take this opportunity to thank my Industry mentor at Dodsal E&C Pte. Ltd., Mr.

Garry Crighton (Executive Director- Corporate QHSE) who has been my constant

source of strength. He not only guided me at crucial times but was also was

instrumental in extracting from me the best possible work.

Mr. Naresh Rijhwani (Vice President- Engineering) at Dodsal E&C Pte. Ltd. and Mr.

Jinesh K. Shah (Project Management- Wood group PSN) were also a great source of

knowledge and information on the research project. I am thankful for their motivation

and contribution in spite of their busy schedules.

Last but not least, I also want to thank to my colleagues at Dodsal, classmates at S. P.

Jain and LinkedIn community members for actively participating in concluding the

research. I am confident that the outcomes of this research project will be of benefit to

EPC sector stakeholders with regards to the cost escalation issues for their projects.


2/106

EXECUTIVE SUMMARY

For Project Managers and Project Sponsors, scope creep and the project cost over runs are

major concerns. The average cost escalation on industrial EPC projects exceeds 12 to 15

percent from the original estimates. Design deviations (changes, errors, and omissions) are

accounted for roughly 80 percent of the increased costs. The value stated above is only the tip

of the iceberg and the real cost escalation sometimes go up to 33 to 50 percent of the estimated

cost for the project. Earlier identification of design issues (preferably at engineering stage) is

easier to handle and have lesser impact on project health.

The research analyzed such cases, referred to various online case studies and gathered expert

opinion through focused group discussions, personal interviews and online survey, as a part of

this process.

As a result, the research could conclude on various aspects of root causes that contribute to the

cost escalation during the detail engineering stage of the project and interestingly the opinion

believed that the major cost escalations originate from the estimation stage or proposal stage of

the project.

Various factors like short bidding time, Bid selection criteria, Inaccurate FEED (Front End

engineering Design) are identified as few of major issues and are discussed in detail inside the

report. Similarly the cost escalation issues arising from during detail design activities like Gold

plating, lack of proper change management, poor implementation of project management

practices were identified and discussed.

Various research methodology tools and techniques and the knowledge areas learnt through

out EMBA course were used in arriving at a systematic understanding of root causes for cost

escalation issues.


3/106

List of Abbreviations

CEO Chief Executive Officer

DCN Design Change Note

DD Detail Design

DE Detail Engineering

E&C Engineering and Construction

EMBA Executive- Masters of Business Administration

EPC Engineering, Procurement and Construction

EPCI Engineering, Procurement, Construction and Installation

FEED Front End Engineering Design

FGD Focused Group Discussion

FIDICFIDIC

Federation Internationale des Ingenieurs ConseilsInternational Federation of Consulting Engineers

FPSO floating production, storage and offloading

FWBS Functional Work Breakdown Structure

GT Gas Turbine

HAZOP Hazard And Operability Study

HR Human Resource

HSE Health, safety and Environment

IFC Issued For Construction

IT Information Technology

ITT Instruction To Tenderer

LSTK Lump Sum Turn Key

MTO Material Take-Off

P&ID Process and Instrumentation Diagram

PHO Project Home Office

PM Project Manager

PMBOK Project Management Body Of Knowledge

PMC Project Management Consultant

PMI Project Management InstitutePMO Project Management Office

PMT Project Management Team

PO Purchase Order

QHSE Quality, Health, Safety and Environment

QRA Quantitative Research Analysis

ROM Rough Order of Magnitude

SIL Safety Integrity Level

SOW Scope Of Work

SPJSGM S P Jain School of Global Management

SPPID Smart Plant P&ID

SWOT Strength, Weakness, Opportunity and Threats

TQ Technical Query

USD United states Dollar

VAT Value Added Tax

VDR Vendor Document Review

WBS Work Breakdown Structure


4/106

TableofContents

1. INTRODUCTION................................................................................................................................ 3

2. INDUSTRYBACKGROUND................................................................................................................ 4

3. INTRODUCTIONTODODSAL............................................................................................................ 8

4. PROBLEMSTATEMENT..................................................................................................................... 9

5. RESEARCHOBJECTIVE.................................................................................................................... 12

6. RESEARCHDESIGN......................................................................................................................... 13

7. PROJECTSCOPE.............................................................................................................................. 18

8. FINDINGANDANALYSIS................................................................................................................. 27

9. RECOMMENDATIONS.................................................................................................................... 36

10. MANAGERIALIMPLICATIONS

.........................................................................................................

45

11. THEWAYFORWARD...................................................................................................................... 48

12. CONCLUSION.................................................................................................................................. 51

13. BIBLIOGRAPHY............................................................................................................................... 52

List of Appendix

Appendix 01 InterviewTranscriptwithMr.JineshKShah

Appendix 02 InterviewTranscriptwithMr.NareshRijhwani

Appendix 03 TranscriptofFocusedGroupDiscussiononLinkedIn

Appendix 04 SurveyForm

Appendix 05 SurveyResults


5/106

2|P a g e

List of Figures

Figure 1 - Average Cost escalation/ Deviations ...................................................................................... 9

Figure 2 - Breakdown of Deviation ........................................................................................................ 10

Figure 3 - Deviation factor contribution % ............................................................................................. 10

Figure 4 - Factors Contributing to Design deviations ............................................................................ 11

Figure 5 - Major Cost Escalation Contributors ...................................................................................... 14

Figure 6 - Problem Area Graph ............................................................................................................. 28

Figure 7 - Problem Area Data ............................................................................................................... 28

Figure 8 - FGD Online Discussion Page on LinkedIn ........................................................................... 29

Figure 9 - Influential position at bidding stage for Cost Effectiveness ..................................................31

Figure 11 - Top Influencer in Estimation stage ..................................................................................... 34

List of Tables

Table 1- Top 5 Global EPC Contractors ................................................................................................. 4

Table 2 Top Oil and Gas EPC contractors in Middle East. ..................................................................... 5

Table 3 - Cost Escalation Factors at bidding stage .............................................................................. 30

Table 4 - Influential position at bidding stage for Cost Effectiveness ................................................... 31

Table 5 - Top Factors at the Detail Design stage ................................................................................. 33

Table 6 - Most Pivotal (Influential) role at Detail Design Stage ............................................................ 34

Table 7 Top Parameters for improving cost escalation ........................................................................ 35


6/106

3|P a g e

INTRODUCTION

The Engineering, Procurement and Construction (EPC) sector plays an important role to

play in economic and infrastructure development. This industry is working in many

sectors such as Oil & Gas, Petrochemical, Infrastructure, and Energy etc. From few big

players to many medium and small companies that work as EPC contractors for major

projects around the world. EPC project contract value varies from few million to multi-

billion US dollars.

For EPC projects, the asset owner or the Client, after successful technical feasibility

study and commercial viability study, proposes to design, engineer and build a project

for practical business purposes. The basic design or the Front End Engineering Design

(FEED) is provided to technically qualified and experienced EPC contractors to propose

an estimate for the project.

In this region (GCC) the contracting strategy adopted that of Lump Sum Turn Key

(LSTK) where the successful bidder are who submitted the lowest price. More Often

than not the project schedules are tight. The fast track nature of this business results in

limited time, resources, Information and funds at the bidding stage does not allow a

Contractor performing due diligence of the tender.

The competitive environment in EPC sector is pushing EPC Contractors to win project

bids at cut-throat prices on Lump sum basis. While executing the project, a new team is

formed to carry out the detail design. There are many discrepancies between the

estimated and the actual design. As a result, escalation of cost and time are inevitable.

Cost escalation and scope creep are the top concerns of an EPC Project Manager or a

Project Sponsor since at the end of the day; he is responsible for maintaining the

bottom-line to green.

This research document studies and analyses the factors contributing to such cost

escalations for the EPC contractor during the detail design phase of the Oil and Gas

EPC project execution.


7/106

4|P a g e

INDUSTRY BACKGROUND

Engineering, Procurement and Construction (EPC) sector has grown with consistent

pace in last 5 to 6 decades. Initially dominated by Contractors from developed countries

like USA, Europe and Japan, the sector was highly profitable. Technological

advancement, research & development and methodological advancement in the sector

reached saturation in late 20th century. In past 20 years, the industry has grown from

few players to over 150 around the globe. At the same time large projects are sub

divided in smaller packages & sub-contracts, depending upon the value associated and

the complexity of the project.

EPC contracts are mainly in following sectors:

Infrastructure/Building Construction

Oil & Gas,

Power,

Chemicals & Petrochemicals and

Specialized Sectors

Following are Top 5 contractors of the time.

Table1- Top5GlobalEPCContractors

RANK FIRM TOTAL 2012

REVENUE $MIL2013 2012

1 1 Bechtel 29,436.0

2 2 Fluor 22,352.83 3 Kiewit 9,600.7

4 4 Turner Corp 9,084.9

5 6 PCL Construction 6,841.5

(https://enr.construction.com, 2013)


8/106

5|P a g e

Over the period there is growing concern on contractors capabilities and project

management skills. Projects contracting strategies have mostly transited from item rate

based contracts to LSTK based. By signing a Lump-sum contract, todays contractor is

deemed to have obtained all necessary information as to risks, contingencies and other

circumstances which may influence or affect the Works.

Table2TopOilandGasEPCcontractorsinMiddleEast.

RANK FIRM TOTAL 2012REVENUE $MIL

2012

1 Petrofac 7006.3

2 Saipem 4245.0

3 Samsung Engineering 3130.0

4 Technip 7099.0

5 Flour 2291.0

31-50 Dodsal E&C Not Known

(Oil & Gas Middle East, 2012)

By signing the Contract, the Contractor accepts total responsibility for having foreseen

all difficulties and costs of successfully completing the Works; and the contract price

cannot be adjusted to take account of any unforeseen difficulties or costs.

As the majority of project risks are transferred to EPC contractors, the contractors risk

appetite and the financial capacity becomes increasingly significant. The burden of the

project management has shifted from the owner/developer to the Lump sum EPC

contractor. Consequently the risk of time and cost overruns are transferred to the EPC

contractors.


9/106

6|P a g e

The rise of China, India and Korea has stretched the competition even further. The rise

of unrest in middle-east has further changed the scenario where the localization is

mandated by the local governments and main works of EPC projects are expected to be

done by local contractors. Overall, the situation is high risk ownership, low profit

margins and cut-throat competition. On average if one contractor moves out, five new

payers enters the market.

Given this scenario, EPC contractors are bound to find new ways to improve operations

and re-engineer its processes to ensure that they survive in the market. With increasing

energy demands, desire for better life, Government investment to push growth model

and technological advancement in energy exploration will ensure that the sufficient

number of projects is created in next 10-20 years.

The major Types of EPC contracts are:

Fixed price (Lump Sum Turn Key)

Firm Fixed price (FFP)

Fixed price Incentive Fee (FPIF)

Fixed price with Economic price adjustment (FP_EPA) (Project

Management Institute,Inc., 2008)

Cost Reimbursable Contracts

Cost plus Fixed Fees (CPFF)

Cost plus incentive Fee (CPIF)

Cost Plus Award Fee (CPAF) (Project Management Institute,Inc., 2008)

Time and Material Contracts.


10/106

7|P a g e

For the Cost reimbursable type of contracts, the risk is shared between EPC Contractor

and the owner and the EPC Contractor is more protected for the risk.

For the Time & Material type contract the majority of the project risk remains with the

owners. Such contracts are exercised rarely and only when the result of the project is

unknown.

Majority of the contracts in the GCC region in Oil and Gas sector are LSTK bases.

Hence, the research in this project is mainly based on LSTK EPC contracts in Oil and

Gas sector projects.


11/106

8|P a g e

INTRODUCTION TO DODSAL

The Dodsal group of companies was founded in Mumbai, India, in 1948 by the Nandlal

Kilachand family as a trading company in partnership with a British trading company

(DODWEL) and Mr. Karsa Salem. Since then, Dodsal has transformed from a family

trading enterprise into a multi-billion dollar Organization.

Today, Dodsal is a Dubai based diversified multinational conglomerate which operates

in the areas of Engineering, Procurement and Construction; Trading and Distribution;

Exploration and Production; Casual Dining Restaurants; and Manufacturing.

ENGINEERING, PROCUREMENT AND CONSTRUCTION

Dodsal Engineering and Construction Pte. Limited, the holding company for the

Dodsals Engineering and Construction business is one of the leading EPC players in

the Energy, Industrial and Infrastructure sectors and has successfully implementedprojects in over 22 countries in the Middle East, Europe, Africa, the Indian Subcontinent

and South-East Asia.

Dodsal E&C Pte. Ltd. also carries out Infrastructure development and management

projects and has already completed on finance, build, operate and transfer basis,

pipeline projects in India and North Africa.

Engineering and Construction is the flagship business of the Dodsal that undertakes

Engineering, Procurement and Construction projects as well as large scale complex

Construction only Projects in the Energy, Industrial and Infrastructure sectors in the

Middle East, Asia, Africa and Europe.

On its projects, Dodsal deploys full time Project Management task forces comprising of

project personnel from all disciplines, including Project Management, Engineering,

Procurement, Construction, Commissioning and Project Support Services.

Dodsals Engineering and Construction teams have a proven track record of high safety

standards and the company has achieved Lost Time Injury Frequencies that are

consistently well below industry averages, receiving several letters of appreciation andsafety awards for their successful and timely project execution. (Dodsal E & C Pte. Ltd.,

2012)

You can find more details of company business at company website:

http:\\www.dodsal.com


12/106

9|P a g e

PROBLEM STATEMENT

Highly competitive Oil & Gas EPC market is yet another Red Ocean where the

contractors bid projects absorbing very high business risk. Oil & Gas Companies, taking

advantage of the market situation, pass on complete project risks to the EPC contractor

in the form of Lump-sum Turn Key (LSTK) contracts.

It is highly essential for the EPC to complete the project within Time, Cost and Quality

constraints, absorbing all the risks. The cost escalation during the project execution is

highly detrimental to the financial health of the project. For many contractors, it is a

matter of survival in the industry.

In spite of due care in project estimation process, the contractor encounters various

unforeseen cost escalations during the execution of an EPC project. Engineering phase

being most critical phase in deciding the desired project output; identifies many issues

that lead to the cost escalation for overall project.

The average cost escalation on industrial EPC projects exceeds 12 to 15 percent.

Figure 1 - Average Cost escalation/ Deviations

87.60%

12.40%

Basiccosts

Deviations


13/106

Design

the incr

(Constr

The val

to 33%

If we s

chart. (

eviations

ased cost

ction Indu

e stated a

o 50% of t

e the par

onstructi

(changes,

s, while co

try Institut

Fi

bove is on

e estimat

to analysi

n Industry

Figur

2.5

17.00

rrors, and

nstruction

e, 2013).

ure 2 - Br

ly the tip o

d cost of t

s of the d

Institute, 2

3 - Deviati

%

0.40%

4.00%

omissions

eviations

akdown of

the icebe

e project.

viation co

13)

on factor c

9.50%

79.00%

accounte

ccounted

Deviation

g and the

sts the re

ontribution

for rough

for only ab

real cost e

ults look

%

Design

Constructi

Others

Design

Construct

Others

10|P

ly 80 perc

out 20 per

scalation g

imilar to b

n

ion

a g e

nt of

cent.

o up

elow


14/106

The De

The ab

(Constr

All the

complet

the pro

escalati

manage

over.

If the f

(Biddin

The re

escalati

ign factors

ve clearly

ction Indu

PC contr

ing project

curement

ns are o

ment tea

ctors cont

and Detai

earch is

n during e

4.50%

are furthe

igure 4 - F

hows the i

try Institut

ctors in O

over its b

and const

igination f

is helple

ributing th

l design) o

n honest

ngineering

20%

classified

actors Con

mpact of d

e, 2013)

il & Gas s

udget. Th

ruction st

om biddin

s as the ti

cost esc

the projec

effort to l

stage of t

as below.

tributing to

esign chan

ctor in sp

realizatio

ges of t

g or engi

me has p

lations ar

, then maj

ook in to

e project.

54.10%

Design de

ges on the

ite of kno

of the co

e project

eering sta

ssed and

taken ca

rity of cos

various is

D

D

D

viations

overall pr

ing these

t escalatio

. Majority

ge. Howe

the Engin

re during t

risk can b

sues leadi

esignchange

esignerror

esignomission

11|P

ject outco

facts end

n comes u

of these

er, the pr

ering pha

he initial

e avoided.

ng to the

s

a g e

e.

p in

nder

cost

oject

e is

tage

cost


15/106

12|P a g e

RESEARCH OBJECTIVE

The objective of this research project is to identify and address the root causes

contributing to the cost escalation during engineering phase of EPC oil & Gas Project

execution. The project research shall not only focus on the root causes contributing to

the cost escalation but also to suggest recommendation to overcome the risk of Cost

escalation.

The research will be carried out based on Industry data; Web based case studies,

captured cost escalation cases (Within and outside Dodsal) and lessons learnt on

recent EPC projects executed by Dodsal in recent past.

The main research objectives are:

To study and identify the factors contributing to cost escalation during project

Engineering execution phase.

To study and identify the operational issues in engineering execution process

for EPC project.

To conform if the problems are company specific or across the EPC sector.

To gather information on the best practices adopted across the industry.

To apply Management knowledge area tools and techniques for identifying

remedies to the contributing factors.

To propose the improvements in current process to avoid the risk of cost

escalation.

To establish a well-rounded report and conclusion at the end of the study.

At the end of the research project, a comprehensive project report and Power point

presentation is prepared based on facts, findings and resultants of the qualitative and

quantitative research. The project reports not only focus on the root causes contributing

to the cost escalation but to suggest recommendation to overcome the risk of Cost

escalation. A brief power point presentation shall be conducted for the stake holders.


16/106

13|P a g e

RESEARCH DESIGN

The Research Design was combination of both Qualitative and Quantitative

methodology. The below paragraphs details the type of research data used for the

project. Both Secondary and Primary data research carried out as part of the project

work.

Secondary research data:

The Secondary research data in terms of Design change notes, Lessons learnt from

previous projects and web based literature was referred.

The Design change notes, lessons learnt with cost variation notes are captured and

stored from various recent projects within the company. Engineering failures and quality

non- conformance identified in past were reviewed and identified to prepare the

preliminary basis to start the project.

Web based research data, competitor data, and research work carried out in past were

cited for problem definition.

Primary research data:

Personnel interviews and web based Focused Group Discussions as primary research

was conducted for problem definition and inputs to generate the basis for quantitative

research.

Qualitative research in the initial stages of the survey, incorporating video calls,

Focused Group discussions and debates helped broaden our knowledge and

understanding of the problem providing an exploratory report.


17/106

The qu

establis

related

Detaile

determi

Below i

Resear

The 3 m

I

F

antitative

ing focus

to Engine

percenta

e the resu

an illustra

h Instrum

ain resear

terview S

GD and

uestionnai

research i

d and con

ering activ

e and gr

lts more ef

tion of our

Figure 5

ents

h instrum

hedules

res

ncluding

clusive res

ities were

phs are

ectively.

Quantitativ

- Major Co

nts includ

detailed

ults. The t

gathered

ubmitted

e Researc

st Escalati

d in this re

question

rget respo

by means

as a part

results.

n Contrib

search:

aire and

nses of 20

of online

of the re

tors

14|P

survey h

+ respon

question

ult in ord

a g e

lped

ents

aire.

r to


18/106

15|P a g e

Since there are various research instruments, a healthy mix of survey was selected for

great benefit to establish the desired results.

The steps and procedures was followed systematically and included:

Content Analysis.

Evaluation Research on the various triggers of cost Escalation.

Human Factors and psychology of the Team members.

Organizational analysis of different competitor industries.

Extensive Surveys

Sampling Methodology

There are various methods that can identify the frame of aspects contributing to the

cost escalation factors as understood by the stakeholders. However, the 2 methods

incorporated were:

Systematic sampling (75%)

Stratified sampling (25%)

Systematic sampling conducted by arranging a target population to which we

reached out to with the set questionnaire. A key study was drawn initially to ensure

that the target population selected was all of the similar experience levels with

similar industry sector. This was aimed to produce accurate results.

Stratified sampling was important to accurately draw a final conclusion. Here we

gathered a whole target population after which we divided them into individual strata.

Each Stratum was divided by the years of experience, positions held, Complexity

and performance on cost escalation sides. This method ignored irrelevant and


19/106

16|P a g e

incomplete data; targeting achievement of efficient results. It permitted greater

balancing of statistical power of tests of differences between the different strata and

sample equal numbers from the varying audience.

Systematic sampling technique used predominantly throughout the research. The

participants for personal interview and FGD were selected from the relevant groups

and organizations, based on their relevance to the subject, willingness to contribute

and experience level.

For Quantitative research, the online questionnaire was distributed through e-mail

and web based survey will be conducted.

Sample Size

The sample size for personal interview was 2.

One person within and one person outside company, within industry.

100+ responses collected for detailed questionnaire.

Target Respondent

The Qualitative research was planned in two parts, that is Personal interview and

Focused group discussions. Two detailed interviews conducted Mr. Naresh

Rijhwani from Dodsal and Mr. Jinesh K Shah from the similar EPC industry player.

The criteria for the selection of the personnel were on the basis of the participants

experience and his willingness to contribute for the cause. Their experience level

varies from 20 to 35 years in EPC industry having senior to top management level

position.


20/106

17|P a g e

Focused group discussion was conducted in EPC consultants group on LinkedIn

with more than 28000 professional and experts coming from various disciplines,

whose interests are linked with the project. Please refer appendix-03 for details of

the FGD opinions. Estimation, HR, HSEQ, Project Planning, Project controls are

few disciplines to name a few in the list with engineering discipline.

The representatives are 1-40 years of experience working in EPC sector similar to

Dodsal.

For quantitative research, a questionnaire was prepared on

www.surveymonkey.com and distributed through e-mail and website (LinkedIn)

connections. Please refer to the appendix-04 for details of the survey form.

At least 200 respondents working in various EPC contractor companies attended

the survey, out of which 100+ completed survey result were considered for further

analysis. Refer appendix-05 for survey results.

Web assistance ofwww.surveymonkey.com orwww.linkedIn.com helped targeting

the right audience with higher number of respondents. A larger data collection

brought a good collection and the target respondents were found to be key stake

holders of EPC project execution.


21/106

18|P a g e

PROJECT SCOPE

The EPC project life cycle typically vary from 1 to 3 years and gets executed broadly in

3 phases as the name suggests- Engineering, Procurement and Construction. The

Engineering process during the project execution is generally called as Detail

Engineering Design. The research project will mainly focus on the Engineering part of

the EPC life cycle.

In addition, the estimation process involves limited amount of engineering (Pre-bid

Engineering) that leads to cost estimation of the project bid shall be covered in the

project scope. Though, the pre-bid engineering does not form the part of the project

execution, it defines the cost and schedule base lines for the project. Hence, it has a

considerable impact on project engineering execution. The research is mainly focusing

on the operational issues of the proposal stage and detail engineering design and will

not address the contractual and financial aspects of the project.

Though the explicit procurement and Construction phase cost escalation are not part of

the research, the research recommendations shall address the issues originating at

engineering phase.

The scope of the study will also cover the Human resource aspects like skill sets,

competency and soft issues essential for smooth project execution.

The project mainly focuses on the identification of cost escalation factors and proposes

possible check points to avoid such occurrence for few cases. The judgment for the

proposed check point is an expert opinion and shall be applied on case to case basis

specific to company. EPC sector is widely diversified in terms of geographical regions,

culture, complexity, and scales and hence the concepts discussed may not be used

directly- as is - but with tailoring to the operating context.


22/106

19|P a g e

Various cost escalation reports with company were reviewed and analyzed. The

relevant data are classified information and cannot be displayed in the report. However,

the leanings out of the cases were captured in the research project.

EXCLUSIONS

Any cost escalation arising explicitly related Procurement and Construction issues are

excluded from the scope of the research. However, any development or triggers

originating from engineering having major cost impact on the procurement and

construction activities of the project shall be studied and discussed in detail.

The research is mainly focusing on the operational issues of the proposal stage and

detail engineering design and will not address the contractual and financial aspects of

the project.


23/106

20|P a g e

LITERATURE REVIEW

The cost escalation in EPC sector is a matter of concern for all project holders. In order

to understand the EPC industry, we could find and review various online reports.

Pratap Vijay Padode, Editor-in-Chief, Infrastructure Today and Managing Director,

ASAPP Media Information Group say that delays in our development projects are

forcing more developers to go the EPC way. The new emphasis on EPC is also, sadly,

because investments are looking south. With a double-dip threat in the global economy,

the worst industrial growth in eight quarters in India and projects down to a trickle, EPC

is a stable option. (Ernst & Young Pvt. Ltd., 2011)

A decade ago, the EPC industry comprised a handful of large, complex projects and

multitude small packages and subcontracts. Today, there is no dearth of high value and

complex projects being executed by government and private players. The increasing

size and complexity of projects has, however, led to a growing reliance on contractors

capabilities and project management skills. (Ernst & Young Pvt. Ltd., 2011)

Contracts have evolved from item rate packages to lump sum fixed price binding

contracts. Slowly but steadily, the onus of project management has shifted from the

owner/developer to the contractor. Gradually, the risk of time and cost overruns has

been transferred to the contractor, along with the responsibility of designing,

procurement of materials and construction. Standard clauses and conditions prevailed,

but the EPC contract model has evolved to reflect the shift in balance of risk between

the owner/developer and the contractor. (Ernst & Young Pvt. Ltd., 2011)


24/106

21|P a g e

The problem of cost escalation, schedule escalation and scope creep in the fields of

project management are not new. Various online magazines line Engineering News

records, World Oil, offshore Engineers etc. shall be referred to identify the horizons the

problems in Industry. Websites related to EPC companies and market like MEED,

ZAWYA and PMI were explored to gather the secondary data for the project. Various

study books like PMBOK by PMI, were be referred to standardize the terminology and

learning area.

One recent example studied in the MEED was related to Saudi ARAMCO Wasit

offshore gas project. The project was awarded to Saipem with specified sulfur content in

the project specification. However, while executing the project, there was unexpectedly

high sulfur content. There was a difficult situation for both client and Contractor to

absorb the risk as the project estimated value was amounting to almost 6 Billion USD.

(MEED, 2012)

A recent news article reveals that the South Korean construction stocks have lost

almost 20 percent of their value, falling to levels last seen four years ago, after huge

losses at two firms sparked widespread fears of overseas projects going sour. After the

2008 financial crisis, South Korean builders such as Samsung Engineering Co Ltd and

GS Engineering & Construction Corp won a raft of foreign orders, particularly in the

Middle East. (http://au.news.yahoo.com, 2013)

Some of those contracts have turned into losers as fierce competition has driven down

prices, and inexperience in new areas has meant extra costs. Lack of understanding of

business conditions in new markets and risk arising from moving into new products

resulted in big cost increases in some projects, the firm said in a statement. Across the


25/106

22|P a g e

sector, the decision to chase foreign orders that have turned out to be unprofitable is

expected to hurt bottom lines. (http://au.news.yahoo.com, 2013)

There are various case studies and lesson learnt on the issue are available on web

based literature. At the same time, Dodsal has got vast experience carrying out projects

in different sectors, locations and at different timeline.

The Design change notes, lessons learnt with cost variation notes are captured and

stored from various recent projects. We have strong database within the company for

engineering failures and quality non- conformance identified in past. The same will be

identified and reviewed to prepare the preliminary basis to start the project.

Contract models play very important roles in EPC sector. For understanding of type of

contracts the PMBOK Guide was referred. (Project Management Institute,Inc., 2008)

Additionally the FIDIC guidelines for construction contracts were referred. (Savage,

2012)

Various sections of the FIDIC Contract recommendations were studied for

understanding of EPC contracts:

Red Book: Conditions of Contract for Construction for Building and

Engineering Works Designed by the Employer;

Yellow Book: Conditions of Contract for Plant and Design-Build;

Silver Book: Conditions of Contract for EPC/Turnkey Projects;

Green Book: Conditions of Short Form of Contract. (Savage, 2012)


26/106

23|P a g e

Aim is to understand the contractual obligations of the EPC contractor to serve the

client. Since we are studying the cost escalation, in many cases, I would say in majority

of cases, there is thin line between the change of scope and the contractual obligation.

Hence, as an EPC representative, one should clearly identify and discriminate the

activities which are out of project scope. Also, it is imperative that the cost claims are

put forward in legitimate formats and with legal arguments. (Savage, 2012)

When we identify the variations in the scope and not take up the claims in a correct

manner that the efforts may go in to vein. Hence, various recommendations from FIDIC

for handling the claims were studied and identified as pa part of the research. However,

there are no specific recommendations made in the report for the FIDIC literature review

as it is assumed that the professional project management practice includes the

contract management skills. (Savage, 2012)

It is important learning that the effective contracts management as a part of project

management is essential to ensure that the cost claims are protected. It is important to

write change orders and claims in clear and unequivocal terms. It is important to avoid t

hint or insinuate. Effective record keeping can assist EPC contractors to prove their

entitlements and enable to accurately ascertain their positions in the event that a

dispute arises. (www.out-law.com, 2011)

Various reports on the similar lines from the competitors companies will be requested

and reviewed. Research work related on similar problems carried out by some other

companies, consultants in different sector, region or industry shall be cited for preparing

the basis. As the problem related data within company is available in abundance; more

focus was given to it.


27/106

24|P a g e

Various online articles on the estimation process were searched on websites and

referred. In the PMI knowledge self Hrishikesh Karekar, PMP mentions that the Cost

and timeline overruns are typically associated with what are referred to as forecasting

errors or technical errors, such as imperfect techniques, inadequate data, honest

mistakes, inherent problems in predicting the future, lack of experience on the parts of

forecasters, and so forth. (Karekar, 2013)

These overruns can occur at any point in the project life cycle and for a variety of

reasons: incomplete requirements, poor design (lack of skills to manufacture the

design), and inadequate testing. These reasons are valid and the inadequacies caused

by these reasons can be mitigated by rigorously following many of the standard project

management methodologies and best practices across organizations and industries.

(Karekar, 2013)

Various suggestions are discussed in detail for addressing the gap in estimation

process. The recommendations were analyzed for its application in current scenario.

While accessing the existing scenario in EPC markets, various online magazines were

reviewed and the Project Vendor was one of them. There were interesting articles in the

magazine and one Enhancing the EPC Efficiency was very interesting.

Mr. P. P. Gupta, Managing Director- Techno Electric & Engineering Co. Ltd says that

challenges are inevitable in current EPC market scenario, but the approach to the

management of such problems will be the key to the continuous success. (Project

Vendor, 2010)


28/106

25|P a g e

Mr. Gupta further explains that the qualification criteria for project award are being

limited to competitive pricing, the new inexperienced players winning the project at

reduced Pricing escalates the project risk to the significant high. (Project Vendor, 2010)

According to Mr. Susnato Sen, Project Head (Infrastructure), Tata strategic

management group say that the major challenges to the EPC sector are:

1) Shortage of skilled manpower

2) Low Focus on Engineering as compared to procurement and Construction

3) In efficient sourcing

4) Lack of advanced Project management practice

5) Risk management practices are not yet developed

6) Burdened with less expected revenues and higher debt. (Project Vendor, 2010)

The article discusses various factors that can affect the positive outcomes of the project

or the prevailing threats to the projects success. The major one identified and

discussed is Cost escalation. (Project Vendor, 2010)

The article describes delay in starts and completion of the project, ambiguity in design,

wrong methodology, lack of coordination, frequent changes and socio-economic factors

as major influencers to the cost escalation of the project. Bad project management is

identified as major factor for cost escalation by experts in the article. (Project Vendor,

2010)

The article also suggests the professional project management approach such as

process design flow, material management, and risk assessment can significantly

address the major cost escalation issue of the EPC project. (Project Vendor, 2010)


29/106

26|P a g e

To eliminate challenges in EPC project execution, Mr. Susnato Sen expresses that that

best-in-class project management tools and techniques need to be adopted. He also

emphasizes on necessity to develop an in-house team of experienced professional

project management personnel and developing more understanding of expert

engineering design, particularly for complex technology EPC projects. One of the

important suggestions by Mr. Sen in this context is to set up internal project

management and Engineering Management teams and factor in required time along

with a need to create a risk assessment /management team for large EPC projects.

(Project Vendor, 2010)

It was important to indicate the quantitative figures and facts that can demonstrate the

negative impact on the project. Various online data and previous research projects were

reviewed to judge the quantitative aspects. It is important to note that no clear band can

be defined for cost escalations and experiences have taught us that the cost escalations

can go up to 50% of the original cost depending upon the nature of the project and EPC

execution capabilities. (The Construction Industry Institute)

The Power Engineering magazine was reviewed for various types of contracts for the

understanding of the risk distribution between the owner and the EPC contractor. The

article describes the various approaches in EPC contract award and its estimation

processes. The article clearly says that the lump sum turnkey EPC with Firm Fixed

Price could be the most costly contracting approach and the majority of the risk lies with

the EPC contractor. (Power Engineering)


30/106

27|P a g e

FINDING AND ANALYSIS

The design change notes and the cost variations reports are major issues that spoil the

day. Cost overruns are difficult to justify and when we analyze them, we understand that

the time has already passed to correct or reverse those mistakes. They mostly come as

result of some actions taken or not taken in to the project engineering stage. On the

same lines, I decided to go ahead with my dissertation project and determined to

capture those cost escalations during the detail design stage of the EPC project.

The research started with the understanding that the majority of the cost escalation

came from the detail engineering stage. As we started analyzing the past project data,

industry cases and discussing in the expert forum we came to learn an important

opinion about root causes of cost escalation issues, which was different than the basic

understanding. When analyzed in detail, the cost escalation issues for its root causes,

an important learning came out and that says, for many cases the roots of the cost

escalation lies with the estimation or the bidding stage of the project.

The project scope was extended for the bidding stage analysis as the cost escalations

arising at detail design stage cannot be seen in isolation. It was evident in personal

interviews and the Focused group discussions that the majority of industry expert

believe that major cost escalations come from the bidding stage. The complete research

work then was divided in to two areas,

1. Cost escalations originating from bidding stage.

2. Cost escalations origination from Detail design stage.

Result of the online survey reinforced our understanding that the majority of cost

escalations come from bidding stage.


31/106

When a

Accordi

Please

originat

(Procur

Majority

The ch

Focuse

the exp

Professi

details

sked-

g to you

see any

s...

ment and

of the res

llenge wa

group di

erts all ov

onals grou

f the discu

hich area

ost escal

constructio

ondents v

s to identi

cussion o

r the EP

p with mo

ssions are

ontributes

tion from

n are not i

igure 6 - P

Figure 7 -

ted the Bi

fy the cos

LinkedIn

sector.

e than 28

available i

the most f

its root

cluded as

roblem Are

roblem Ar

ding stag

t escalatio

website re

he surve

00 memb

Appendix

r EPC pro

ause poi

part of the

a Graph

ea Data

as more r

n factors

ceived a t

was laun

rs associ

- 03.

ect cost e

t of view

survey)

esponsible

nd its ro

emendous

ched in E

ted with E

28|P

calation?

from whe

.

t causes.

response

C Consul

PC sector.

a g e

re it

Our

from

ants

The


32/106

The key

listed b

factors id

low:

1. Sele

2. Short

3. Inacc

4. Insuf

5. Skills

6. Biddi

7. Abse

8. In ad

9. Insuf

10. Impr

11. Impr

12. Over

13. Too

14. Ignor

Figure 8 -

ntified for t

tion of bid

bidding ti

urate FEE

icient revi

of Estimat

ng complet

nce of less

equate Ris

icient conti

per bid co

per FEED

ptimistic f

any appli

ing and po

GD Online

he cost es

without ev

e

w of ITT d

ion Team

ely new se

ons learnt

k analysis

ngency re

rdination/

verificatio

asibility

able stand

r assumin

Discussio

alation in

luating its

cuments

ctor

rom previ

erve

anageme

ards

g of non-m

Page on L

idding sta

SWOT

us project

nt

aterial cost

inkedIn

ge of EPC

s.

29|P

project are

a g e

as


33/106

30|P a g e

As a result of the online survey,

Inaccurate FEED,

Skills of Estimation Team and

Improper FEED verification

are identified as top 3 factors.

Table 3 - Cost Escalation Factors at bidding stage

Inaccurate FEED3.86

Skills of Estimation Team3.84

Improper FEED verification3.72

Insufficient review of ITT documents3.64

Selection of bid without evaluating its SWOT3.63

Bidding completely new sector3.62

In adequate Risk analysis

3.59

Short bidding time3.57

Overoptimistic Feasibility Study3.56

Absence of lessons learnt from previous projects3.55

Ignoring and poor assuming of non-material costs3.54

Improper bid coordination/management

3.40

Insufficient contingency reserve3.31

Too many applicable standards3.03


34/106

The low

I

I

When a

manage

The res

F

T

Answer

Estimation

Engineerin

Estimation

Engineerin

Business

Contracts

est contrib

proper bi

sufficient

oo many a

sked- Whi

ment (avoi

lts were

igu re 9 - In

able 4 - Infl

hoices

/proposal man

g Discipline L

leads

g manager

evelop Mana

anager

tors are id

coordinat

ontingenc

pplicable s

h role do

d cost esc

luential po

uential pos

ager

ads

er

entified ar

ion/manag

reserve a

andards

you think i

lation) at t

sition at bi

ition at bid

:

ment

nd

s the mos

e estimati

ding stag

ding stage

pivotal (I

on stage?

for Cost E

for Cost Ef

fluential) i

ffectivenes

fectivenes

Res

3

1

1

1

7

4

31|P

n effective

s

ponses

.02%

.70%

.07%

.82%

.32%

.07%

a g e

cost


35/106

32|P a g e

Majority of the opinion said that the Estimation/Proposal Manager has the highest

influence over the cost escalation and the contracts manager has the lowest.

The key factors identified for the cost escalation during detail design stage of EPC

project are as listed below:

1. Improper change management

2. Poor Risk Management

3. Different team for estimation and detail design

4. Poor coordination between Lead engineers

5. Poor Coordination with Client/PMC

6. Realizing of unstated requirement in Bid

7. Improper multidisciplinary/internal review of documents

8. Engineers biased to high tech products

9. Over specifying (Gold plating)

10. Incapable project manager

11. Interference of client Operation/production team

12. Scope creep due to detail studies (Hazop/QRA etc.)

13. Client/PMC with highly wishful thinking

14. Client/PMC delaying disputes, decisions and reviews

15. Technically weak Client PMC team

16. Engineering subcontractor delays

17. Cost Insensitive Engineering Subcontractor

18. Manpower shortages

19. Frequent changes in Engineering team

20. Inexperienced engineering team


36/106

33|P a g e

As a result of the survey the top five factors identified are:

Inexperienced Engineering team

Incapable project manager

Improper change management

Client/PMC delaying disputes, decisions and reviews

Frequent changes in Engineering team

Table 5 - Top Factors at the Detail Design stage

Inexperienced engineering team3.94

Incapable project manager3.90

Improper change management3.79

Client/PMC delaying disputes, decisions and reviews3.79

Poor Coordination with Client/PMC3.69

Frequent changes in Engineering team3.69

Cost Insensitive Engineering Subcontractor3.62

Improper multidisciplinary/internal review of documents3.60

Engineering subcontractor delays3.57

Scope creep due to detail studies (HAZOP/QRA etc.) 3.55

Poor Risk Management3.54

Realizing of unstated requirement in Bid3.54

Client/PMC with highly wishful thinking3.51

Poor coordination between Lead engineers3.46

Over specifying (Gold plating)3.46

Interference of client Operation/production team3.41

Manpower shortages3.39

Technically weak Client PMC team3.31

Different team for estimation and detail design3.28

Engineers biased to high tech products3.09


37/106

The low

Wheman

The

Table 6

Engineeri

Project M

Engineeri

Project C

PMC

Risk man

est 3 influe

echnically

ifferent te

ngineers b

n asked-agement (

results are

Most Pivo

ng manager

anager

ng discipline

ntrols mana

ager

ncers are:

weak Clien

m for esti

iased to hi

hich rolevoid cost

tal (Influent

Leads

ger

Figure 1

t PMC tea

ation and

h tech pro

o you thinscalation)

ial) role at

0 - Top Infl

detail desi

ducts

is the moat the Det

Detail Desi

uencer in E

n

st pivotal (Iil Design s

gn Stage

stimation

nfluential)tage?

32.50

27.50

23.33

10.83

3.33

2.50

tage

34|P

in effective

%

%

%

%

a g e

cost


38/106

35|P a g e

The majority believed that the Engineering Manager, Project Manager and Discipline

Leads are the key influencers to the cost escalations.

The research is intended for the resolution to the problem; hence it is import to judge

that what are the influential factors that contribute to effective cost management of

the project?

When asked- Please rate below parameter on the scale of 1-5 that can

improve/avoid cost escalation. (1 lowest, 5 highest)

Table 7 Top Parameters for improv ing cost escalation

Strict project design change management system3.98

Implementation of proper Project management practices. 3.81

Careful Selection of Bid after proper evaluation.3.76

Implementation of proper Risk management practices.3.71

Cost/Budget awareness programs.3.71

Focus on motivated Team to execute the Jobs.3.71

Emphasis on learning from past projects.3.68

Emphasis of capturing and review of lessons learnt. 3.63

Continuous focus on Learning and Growth.3.46

Implementation of Award and Recognition program3.22

The top 3 factors were

Strict project design change management system

Implementation of proper Project management practices.

Careful Selection of Bid after proper evaluation.

The least important factors were:

Continuous focus on Learning and Growth.

Implementation of Award and Recognition program


39/106

The re

project.

The nor

Strengt

Careful

selectio

bid in t

experie

reputati

propose

decisio

The tim

date ext

be det

Compa

ort recom

mal EPC p

hen the Bi

bid selecti

of projec

rms of E

ce in sect

n shall b

d PMC c

.

allowed t

ension is q

rmined b

y.

Phase

Ph

ends foll

roject phas

d selectio

on can le

t for biddin

C Contra

r, comple

e evaluate

nsultant b

o bid is ver

uite comm

sed on

1Tender

se2Esim

Phase3

Phase

Ph

RECOM

wing mai

es are as il

process

d to avoi

g shall be

tors expe

ity and sc

d. Contra

y the Co

y importan

on in EPC

tatistical

Reviewa

ationpro

etailDes

4Procur

ase5Co

MENDA

action pl

lustrated b

at phase -

ance of l

selected b

rtise in pr

le of the p

tors past

pany sha

t factor. It i

sector. He

methods

ndappro

cess

gnonaw

mentse

struction

IONS

ans for th

elow for e

1

ss of tim

ased on p

cess tech

oject. The

experienc

ll be eval

s well kno

ce, an est

nd previ

al

ard

vices

services

Estimati

sy underst

and effo

roper asse

nology, G

nature of t

e in hand

ated prior

n that the

imate of bi

us experi

36|P

n stage o

anding.

ts. The c

ssment of

ographic

e client a

ling the c

to Go/No

bid submi

ding time

ence with

a g e

the

reful

EPC

rea,

d its

lient,

GO

sion

shall

the


40/106

37|P a g e

Preliminary review of the FEED content shall be carried out by the select team of

expertise from Contracts, estimation and Engineering for its completeness.

Comprehensive SWOT analysis needs to be done and shall form the basis of Go/ No

Go for the project.

Implementation of Risk Management Process at phase - 2 to 5

Proper Risk management practices shall be implemented in both bidding and detail

design phase of the project. In fact the process shall be extended for the entire project

life cycle. Qualitative and quantitative risk identification tools and techniques may be

included as per the nature of the project. All risks, may it be smallest and have lowest

impact shall be captured and evaluated for its avoidance, transfer, acceptance and

mitigation. A comprehensive risk register shall be a must requirement.

A proper Risk data quality assessment, risk categorization, risk urgency assessment

and continuous update of risk register shall be implemented. Identified risks and its

triggers shall be well documented. The ownership of the risk shall be distributed to

project personnel for continuous monitoring and update of the risk register.

Professional Project management approach for not only execution but to Bid

stage at phase - 2 to 5

There is no doubt that companies implementing professional project management

during project execution achieve higher rate of success. However, the bid estimation

stage is executed in traditional way. The bid estimation shall be considered as a project

itself. A complete project management practice shall be applied in carrying out the

project Bid. All five process groups and various processes as documented and guided

by PMBOK shall be considered with appropriate selection and tailoring of the project

management processes.


41/106

38|P a g e

Each phase of the estimation process and lessons learnt, assumptions shall be

captured and documented so that it can be passed on to the execution team for post bid

works. Clear-cut project baselines in terms of schedule, cost and quality shall be

defined and issued for execution.

Implementation of scope identification and scope definition with help of detailed FWBS

(Functional Work Breakdown Structure) shall be practiced and the bottom-up estimation

shall be used. Apart from above methods, tools like analogous estimation, parametric

estimation and reserve analysis shall be used to achieve correct rough order of

magnitude. It is important to remember that the estimation being short-time process

may not allow the estimation to be accurate to the extent of +/- 10%. Hence the reserve

analysis and cost of quality like tools shall be employed as required.

Use of software based estimation shall be considered to avoid manual errors.

Many organizations have different teams for estimation and execution processes. These

results in loss of information and knowledge gathered during the bidding process. Key

personnel for bidding team shall form the part of EPC execution and shall be made

responsible for capturing cost at early stage.

The company shall look in to the possibility to reduce the number of design changes by:

1. Comprehensive project scope definition.

2. Interdisciplinary reviews with affected stake holders and

3. Implementing processes to limit scope modifications. (Construction Industry

Institute, 2013)


42/106

39|P a g e

The rotation of few members of bidding team and EPC execution team has been found

to be a useful concept. By doing this as the knowledge of execution problems can be

well covered in both bidding and execution stage.

Development of Skil led Estimation team at phase - 1 & 2

Estimation being short time period process needs higher level of experience. A team of

experienced engineers mainly from detail engineering background shall be made lead

for engineering team.

Concepts of value engineering and innovative approach are must for acquiring the

competitive advantage over other bidders. An alternate bid with improved functionality

and reduced cost can outperform the competitors. Careful material selection, optimized

quantities, proper FEED endorsement, innovative construction methodology, optimized

man power deployment plan, effective scheduling techniques along with

detailed/improvised technical documentation at bid stage can reduce the cost escalation

risk for the EPC contractor.

Learning and development are important factors for skill development. Vendor

presentations, Technical seminars, new products, innovative hardware and construction

technology are important factors that can bring competitive edge in bidding process.

The report recommends following main action plans for the Detail design stage of the

project.

Implementation of Strict Change management system at phase - 3

While execution stage, most of the documents are developed based on the given FEED

documentation. Clear baselines in terms of scope, cost and schedule are inputs to the


43/106

40|P a g e

execution process. While developing the detail design it is important that any change is

identified and captured at the first/generation stage. All updates, changes, upgrades,

improvements, detail design, addition, reduction in whatever name it comes shall be

compared and identified as change and shall be registered in the change register.

Any change shall be evaluated for its necessity and impact on the project output. If the

change is agreed to be necessary or unavoidable, shall be routed through its implication

review. The ROM shall be made and determined if the change comes from the client or

as a result of detail design.

Only execute the change that is agreed and approved by project Change management

committee.

In the below section, the research process have tried to explain the proposed Change

management process that can be implemented in order to manage the project changes

effectively. The basis of the design is based on expert judgment and experience gained

in past.

Step-1

The change management process starts with the identification of change/deviation

event. This is broadly called as initiate change. The variation or the deviation shall be as

compared to baselines (Cost/scope and schedule)

Responsibility: Any project team member.

Time frame: 1 to 2 days

Output: Intimation to Project controls department.


44/106

41|P a g e

Step-2

Register the change description in to project change register/log or IT enabled Change

management system. Minimum assignments are change number and its Type.

The Change types can be classified as following:

Client initiated (scope/schedule and reimbursable cost escalation)

EPC in-house (value Engineering/ detail Development/ deviation/ baseline shift)

Output: intimation to Change control Board with change intimation form.

Step-3

The change control board shall take the decision on whether to proceed with the

deviation. It is important while analyzing such trends/changes that the project cost,

scope and cost baselines shall be evaluated for impact of changes.

If the decision is made in favor of the change, then the Rough order of magnitude

ROM estimate shall be prepared and all impact report shall be prepared. The

proposed changes shall be conveyed to the stakeholders including the client as

appropriate. Proceed to step-4.

If the change management board thinks that the change shall not be processed,

it will advise the project team to develop the mitigation plan. The Change register

shall be updated for the outcome and the concerned team members shall be

informed for rejection.


45/106

42|P a g e

Step-4

If the change is Client dependent or initiated by client requirement, then the change

approval shall be taken-up with client for approval for its impact on cost, schedule and

scope baselines. If not, then proceed as in-house change.

Detailed estimate on Cost, schedule and scope shall be prepared by project

controls with the help of project management team. The help of Engineering,

procurement, construction and estimation team may also be taken for arriving on

definitive estimate. The impact on the project based on definitive estimate shall

be evaluated for the feasibility and viability. If satisfactory, the Completed

definitive estimate irrespective of client originated or in-house changes shall be

submitted to client for final approval.

Step-5

The estimate, discussions and negotiations with Client and the project management

shall continue and shall be iterative until the agreement for approval or rejection is

reached.

If not agreed by client, appropriate mitigation plan shall be prepared by the

project team. The change register shall be updated for the outcome. Concerned

team members shall be informed.

If agreed by the client, and if the change is client initiated, official change order

shall be signed. The change register shall be updated for the outcome. Project

team shall be informed to execute the approved changes.

Only agreed change order shall be processed for execution. Reconcile the Cost,

scope and schedule baselines with execution plans.


46/106

43|P a g e

The potential Change Notice Form being first important step in the process, following

important fields shall be included in the form as minimum.

1. Project Change order number

2. Client name

3. Project name

4. Location

5. Project ID

6. Date initiated

7. Discipline engineer

8. Discipline Lead

9. Description of potential change notice

10. Possible Cost impact on Project (Yes/No)

11. Possible Scope impact on Project (Yes/No)

12. Possible Schedule Impact on Project. (Yes/No)

13. Requesting person

14. Reason for change

15. Other disciplines affected

16. Impact if the change is not implemented.

17. Source (Client change/ in-house change)

18. Approval (prepare ROM/ reject)

19. Comment note

20. Approval authority


47/106

44|P a g e

Human recourse plan for all Phases of project life cycle.

Companies relying on qualified personnel are more insulated from the risks.

Qualified and certified executives with right experience implementing the project can

drastically change the project outcomes. Researchers have found that the certified

project managers, Estimation managers and Engineering Managers are vital influencers

in avoiding the cost escalations

The process starts with the comprehensive human resource plancareful selection of

Qualified, certified and well experienced personnel is a first step in process

A comprehensive performance review and reward system needs to be developed in

order to retain the key people for the success of the project. There should be incentive

for Lead engineers to stay with company for specified period as the lead engineers

leaving in-between the project can significantly hamper the process.

Skill development for engineers and technocrats can be an important tool that can uplift

the talent pool for the company. Regular technical trainings and technical participations

can bring positive results.

Companies build on its expertise bay carrying the experiences and lessons learnt from

one project to the next. The right mix of young graduates and long-term employees play

major role in the process improvements and provide backbone for innovation in order to

achieve the strategic advantage over the competitors.

A comprehensive learning management concepts including, process mapping, goal

setting, balance score cards, 360 degree appraisal process, Team building and internal

customer satisfaction shall be inducted in to the system to achieve higher satisfaction

and morale of the team.


48/106

45|P a g e

MANAGERIAL IMPLICATIONS

The research identifies various factors contributing to the cost escalation in bidding

stage and the detail design stage of an EPC project. The key influencers identified in

the process of cost optimizing are Estimation Manager, Project Manager and

Engineering Manager.

The first step in the direction will be to form a task force to for identification and

application of researched data in to present organizational context. The task force

members shall be selected on the bases of Qualification, certification and expertise in

the EPC sector. Discipline engineers shall be involved. If required the external

consultant shall be appointed.

As a result, the company wide message can be given on emphasis on the cost

awareness. Management can achieve its goal only with help of the employees and the

team for the project. Concept of PMO is very important in this context. For consistency

across the projects and achieving long terms objectives the PMO can provide trained

project managers, processes and procedures. It can also help providing cultural

backbone for professional EPC project management.

The additional man hour costs for the above activities shall be tracked and mapped as

cost of Quality and cost of prevention. It is important to remember that above

recommendation increases the overhead expenses of the company. The cost of

prevention shall be much lower than the cost of defect repair.

The second step is to collect the organizational process maps. Identification of list of

important process maps shall be developed and compared with the existing processes.

If required the new process maps shall be drafted.


49/106

46|P a g e

It shall be ensured that all critical activities are cover by one or multiple process maps.

Each cost escalation factor identified in the research shall be applied to the existing

process/processes. Separate checklist based on the for Estimation, Project

management and Engineering management shall be prepared.

Cost awareness, tight project control and effective project management are more of

organizational culture and team work than the demonstration of individual skills. In the

process, it is important that decisions are taken in favor of companys stated interest of

effective EPC project execution efficiency based on procedures and not individual

capacity. The project management team needs continuous guidance from the

organizational process assets and even the lowest hierarchy of the project team is able

to take appropriate decisions based on the company guidelines, without waiting for

higher-ups.

As recommended, the strict project change control system shall be implemented so that

only the approved changes are implemented, Concerns are addressed, unnecessary

work and consequent rework can be avoided. The most important achievement of the

process is no surprise. All potential deviations and changes are identified at the initial

stage and not when the consequences are out of control. This will also avoid burden of

cost overrunning and budget constraints on project management team, increasing

morale.

The focus shall be

1. To identify any change at the earliest stage of the project.

2. Identified change shall be immediately reported to Change management system.

3. Thorough review and approval of Change.

4. Execution of approved changes only.


50/106

47|P a g e

It is assumed that the Risk management activities are carried out by the Project

Manager and Estimation Manager. If this is not the case, Risk manager shall be actively

involved in the project.

Specially, at the estimation stage, risk register shall be initiated with the inputs from all

concerned disciplines. Careful consolidation of risk register is important. Once the risks

are identified, logged and consolidated, adequate contingency reserves shall be

proposed in addition to project costs. The same risk register shall be handed over to the

project risk manager for tracking and further updating. The advantage is that the project

manager is aware in advance for envisaged and considered project risks and its

triggers. A very common scenario in the project execution time that the risk has realized

and there is no plan or contingency reserve provision for it can be avoided.

The Human resource management needs to be involved for devising the mechanism to

recruit, train and retain the project staff. The average cost salary of certified Project

manager or Risk Manger will be 10-15% more. The retaining costs of the qualified

people are also higher. However the value buy-in is in multifold.


51/106

48|P a g e

THE WAY FORWARD

From the analysis of secondary and primary research results I am able to identify and

analyze the list the cost escalation factors in EPC sector and especially for EPC

contractors.

The most important factors and influential parameters are identified in the research. A

proposed way of resolving the one of the major factors- Change management plan is

illustrated in the project report. The first thing that needs to be looked in is the existing

Change management process. The process needs to be reviewed for fulfillment of its

intended purpose. If required, needs to be updated or revised to the desired level. The

work shall be accomplished within 2 weeks time. Once approved by management, the

Change management process shall be mandated to all existing projects. A special

introduction of Change management plan through trainings, seminars and focused

Group shall be discussed among the project teams. Within 2 month the process shall be

operational. A careful monitoring shall be carried out specially for initiating the change

requests.

Parallel to above, based on the organizations present situation, the process maps

related to Estimation and Engineering processes needs to be revisited and the

adequate check points needs to be ensured in the process. This process takes around

4 to 8 weeks time or 4-8 months based on preparedness and maturity of the

organization for its process assets. If required separate checklists shall be prepared and

implemented across the projects. Since the estimation process is shorter in time as

compared to Detail design, a special care shall be taken in designing the checkpoints

ensuring that the check points do not make the process sluggish.


52/106

49|P a g e

Organizations which does not have formal process maps for those activities, may start

developing the check list as a quick tool to ensure that the cost escalation factors are

not ignored and in fact captured at the initial stage. Companies can look for IT based

solutions to reduce the human errors.

Strict implementation of professional project Management and Risk management

practices shall be emphasized. The recruitment process shall be updated for more

focus on right mix of Qualification and experience while selecting the project team.

A comprehensive skill development and rewards/recognition system to be initiated to

retain the talent pool of the organization.

The recommendations need strong management support for implementation.

The research work was primarily carried out for the Estimation/ bidding stage and detail

design stage of the EPC project. The EPC sector has two more major phases that

consumes majority of project budget. Though the activities carried out in procurement

and construction is based on specifications, drawings and guidelines generated from

the engineering stage, it has its own area where there is risk of the cost escalation. This

research being time bound and for academic purpose, limited its scope to Bidding and

Engineering stage only. Management may take the further decision to promote carrying

out further research in the area of procurement and Construction of the projects.


53/106

50|P a g e

The time line for implementation of the Implementation process is advised as below.

Activi tyResponsible

Function

Key responsible

personDuration

Review and update of existingChange management system

PMO Head PMO

2 weeks

Implementation of Change

management system

Project

ManagementProject Manager

1 month

Process mapping for Estimation

and Engineering processes

Engineering /

Estimation

Discipline

Manager

1 to 8 Months

Implementation of engineering

checklistsEngineering

Engineering

Manager

3 months to 1

Year.

Development of Skill

development programHuman Resources

HR Manager/

Discipline

Manager

3 moths

Development for reward and

recognition systemHuman Resources HR Manager 3-4 months

Preparation and implementation

of Training calendarHuman Resources

HR Manager /

Discipline

Manager

6 Months

Start further research on

Procurement and construction

phase for identifying the cost

escalation issues

Management CEO 1 Year.


54/106

51|P a g e

CONCLUSION

The cost escalation issues can be effectively handled by EPC organizations at the early

stage of the EPC projects, mainly during the estimation and detail engineering stage by

implementing Professional Risk Management and Project Management practices. Early

identification and definition of cost triggers can be punched in project risk register and

actively monitored by the project management team during the project life cycle.


55/106

52|P a g e

Bibliography

Besterfield, D. H., Besterfield, C., Besterfield, M., Besterfield, G., Urdhwareshe, H., &Urdhwareshe, R. (2011). Total Quality Management (3rd ed.). India: PearsonEducation.

Chandra, P. (2009). Projects (7th ed.). Tata McGraw-Hill.

Construction Industry Institute. (2013, Jan 1). Retrieved from Construction-Institute:https://www.construction-institute.org

Dodsal E & C Pte. Ltd. (2012). Risk Management. Procedure, Dodsal E & C Pte. Ltd.,HSEQ.

Dodsal E&C Pte. Ltd. (2013, February 2). Engineering, Procurement & Construction-The Dodsal Group. Retrieved December 2013, from The Dodsal Group Website:http://www.dodsal.com/enc/

Ernst & Young Pvt. Ltd. (2011). Engineering, Procurement and Construction (EPC)-Drivig Growth Efficiency. ASAPP Media Information Group.

Galway, L. (2004). Quantitative Risk Analysis for Project Management-A CriticalReview. RAND Internal Research and Development (IR&D) project, RAND Corporation.

http://au.news.yahoo.com. (2013). south korean builders brace for losses as overseasprojects go sour. Australia. Retrieved 2013, from http://au.news.yahoo.com/latest/a/-/latest/16831607/south-korean-builders-brace-for-losses-as-overseas-projects-go-sour/

https://enr.construction.com. (2013). The Top 400 Contractors. Engineering News

Record.

IBM Business Continuity and Resiliency Services. (2009, January). Business resilience:The best defense is a good offense. 6.

Karekar, H. P. (2013, February 25). Reducing the Estimation Gap. Knowledge Shelf-PMI .

MEED. (2012). Wasit delay a new challenge.

MEED: Middle East news, data and analysis. (2012, November 15). Retrieved fromMEED: http://www.meed.com

Middle East Business,Financial and Investment News. (2012, Jan 25). Retrieved fromZawya: http://www.zawya.com/

Moore, M. (2008, March 19). Seattle Contractors Struggle To Cope With CostEscalation that Adds Risk. Retrieved Jan 12, 2013, from http://enr.construction.com/:http://enr.construction.com/features/bizLabor/archives/080319e.asp

Mulcahy, R. P. (2009). PMP Exam Prep (Sixth ed.). USA: RMC publications, Inc.


56/106

53|P a g e

Oil & Gas Middle East. (2012). Top EPC Contractors.

Power Engineering. (n.d.). www.power-eng.com/artproject contracting strategiesevaluating cost risks and staffing req

Date post:	03-Apr-2018
Category:	Documents
Upload:	rahul-raghukumar
View:	233 times
Download:	0 times

Engineering Cost Escalations Project Report.pdf

Documents