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Research Summary 130-1

REFORMING OWNER,
CONTRACTOR, SUPPLIER
RELATIONSHIPS:
A PROJECT DELIVERY SYSTEM
TO OPTIMIZE SUPPLIER ROLES
IN EPC PROJECTS
Construction Industry Institute
Air Products & Chemicals, Inc.
AlliedSignal Inc.
Aluminum Company of America
Amoco Corporation
Anheuser-Busch Companies, Inc.
Aramco Services Company
Atlantic Richfield Company
Bayer Corporation
Celanese
Champion International Corporation
Chevron Corporation
CITGO Petroleum Corporation
Commonwealth Edison Company
DuPont
Eastman Chemical Company
Exxon Research & Engineering Company
FPL Energy, Inc.
General Motors Corporation
Houston Lighting & Power Company
Intel Corporation
Eli Lilly and Company
Mobil Technology Corporation
NASA
Naval Facilities Engineering Command
Ontario Hydro
Phillips Petroleum Company
The Procter & Gamble Company
Rohm and Haas Company
Shell Oil Company
Solutia Inc.
Tennessee Valley Authority
Texaco
U.S. Army Corps of Engineers
U.S. Department of Commerce
U.S. Department of State
U.S. Generating Company
U.S. Steel
Union Carbide Corporation
The University of Texas System
Weyerhaeuser Company
ABB Lummus Global Inc.
BE&K, Inc.
Bechtel Group, Inc.
Belcan Corporation
Black & Veatch
BMW Constructors, Inc.
Brown & Root, Inc.
Bufete Industrial
Burns and Roe Enterprises, Inc.
CDI Engineering Group, Inc.
Chemtex International Inc.
Cherne Contracting Corporation
Cianbro Corporation
Day & Zimmermann International, Inc.
Dick Corporation
Dillingham Construction Holdings Inc.
Eichleay Holdings Inc.
Fisher Controls International, Inc.
Fluor Daniel, Inc.
Foster Wheeler USA Corporation
Fru-Con Construction Corporation
James N. Gray Company, Inc.
Graycor
H+M Construction Co., Inc.
Hilti Corporation
Honeywell Inc.
International Technology Corporation
Jacobs Engineering Group, Inc.
J. A. Jones Inc.
The M. W. Kellogg Company
Kiewit Construction Group, Inc.
Kvrner Process
Morrison Knudsen Corporation
M. A. Mortenson Company
Murphy Company
North Bros., Inc.
The Parsons Corporation
Raytheon Engineers & Constructors
S&B Engineers and Constructors Ltd.
Stone & Webster Engineering Corporation
TPA, Inc.
H. B. Zachry Company
Reforming Owner, Contractor, Supplier
Relationships:
A Project Delivery System
to Optimize Supplier Roles in EPC Projects
Prepared by
The Construction Industry Institute
Reforming Supplier Relationships Research Team
Research Summary 130-1
September 1998
1998 Construction Industry Institute.
The University of Texas at Austin.
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Contents
Chapter Page
Executive Summary v
1. Introduction 1
2. Development of the Breakthrough Model 4
3. Measuring and Quantifying Its Effects 16
4. Implementation 21
5. Recommendations 27
6. Postscript 29
References 33
v
Executive Summary
By expanding its membership to include suppliers, CII recognizes that
suppliers of key engineered systems and components can and should play
a significant role in the pursuit of CII goals. CII, therefore, established the
Reforming Supplier Relationships Research Team to explore the potential
for reforming traditional owner/contractor/supplier relationships in
engineer-procure-construct (EPC) projects to enhance the ability of
suppliers to contribute more meaningfully to this process.
Believing that a breakthrough approach would be required to
facilitate such a reformation, this research team concluded that if the
role of suppliers of the most critical components and systems in a
project is to be enhanced, then one must both enhance and prioritize
the point of definitive contact with those suppliers: the procurement
process. A new project delivery system was envisioned that divides the
procurement process into big P strategic procurement items,
including complex engineered equipment and systems essential for
project performance, and little p the balance of items to be
procured; and then reconfigures the traditional EPC model into
Procurement, Engineering, procurement, and Construction, or PEpC.
In traditional EPC, procurement follows engineering, both
sequentially and in the fact that engineering specifies and defines the
items to be procured. In PEpC, the most strategic and project-critical
procurement transactions occur prior to detail engineering, and those
procured items then influence and define subsequent detailed
engineering. Further, the core competencies of the supplier, which are
often unique and beyond those possessed by either the owner or
contractor, are provided directly into the project delivery system.
Utilizing a sophisticated simulation model of the classic EPC
process, the research team compared the impact of a PEpC approach to
project execution with traditional EPC. In both theoretical and field
implementations, the results indicated that PEpC could produce
savings in excess of 10 percent to 15 percent of the time and four to
eight percent of the cost of the traditional EPC process.
1
1
Introduction
A Challenging Mission
Membership in CII traditionally has been limited to the principal
consumers and principal providers of engineering and construction
services, i.e., owners and contractors. Recently, CII expanded its
membership categories to include the suppliers of major materials,
equipment, and systems that are incorporated into construction
projects. This membership expansion arose from the recognition that
suppliers of key materials, equipment, and systems can and should
play a significant role in pursuit of CIIs mission to improve the cost,
schedule, quality, and safety of the construction industry.
With this new recognition of the supplier community, CII created
the Reforming Supplier Relationships Research Team and tasked it with
examining the relationships and roles of suppliers in traditional EPC
construction. More specifically, the research team was asked to
explore the potential for reforming the traditional owner-contractor-
supplier relationships in EPC projects in order to enhance the ability of
suppliers to contribute more meaningfully to the process.
The research team recast this assignment into the following
problem statement:
Strategic procurement items, including complex engineered
equipment and systems essential for project performance, are
frequently designed, manufactured, and delivered by suppliers
who are outside the traditional circle of cooperation
between owner and contractor. The expertise embedded in the
design of this equipment, as well as the expertise needed for its
successful integration, operation, and maintenance is
frequently lost or under utilized. The resulting inefficiencies
have an impact on the time, cost, and quality of engineering
and construction as well as on the life cycle performance of
constructed facilities.
2
After considerable discussion, and believing that a meaningful
solution could be found, the research team posed the following
hypothesis that would become the subject of its future efforts:
It is possible to systematically reform relationships between
owner, contractor, and supplier so that suppliers of strategic
procurement items and/or systems can be included in the full
EPC process and thereby have a significant positive impact on
the time, cost, and quality of the entire engineering and
construction process, as well as on the life cycle performance
of constructed facilities.
The hypothesis was based on the belief that substantial savings in
time and cost could be realized if a step change in traditional owner/
contractor/supplier relationships could be achieved in such a way as to
make it possible for suppliers to contribute effectively in every phase of
the total facility life cycle. It was clearly felt that owners, design
contractors, and construction contractors would benefit from new and
dramatically different relationships with suppliers, who should no
longer be silent partners in the EPC process.
An Innovative Methodology
Addressing the problem statement and confirming the hypothesis
required a research effort that extended beyond the classic steps of
identifying a problem, gathering data, examining results, and
recommending change. A suitable methodology was, therefore,
developed that included the following four key steps:
1. Initiating an extensive search for innovation within and
beyond the boundaries of the industrial construction industry.
2. Defining a breakthrough project delivery system, which
would make it possible to utilize supplier expertise in all
phases of the project life cycle.
3. Measuring and quantifying the effect of implementing the
breakthrough in both theoretical and field implementations.
3
4. Developing the required tools to facilitate the routine
implementation of the breakthrough throughout the industry.
The results of Steps 1 and 2 are covered in the following chapter.
The measurement process is discussed in Chapter 3; and
implementation procedures are in discussed in Chapter 4.
4
2
Development of the Breakthrough Model
A Search for Innovation
The research team set out to identify instances or trends of
enhanced supplier involvement, both within and beyond the
construction industry. A literature survey, a mail questionnaire of CII
member companies, and a number of structured interviews by research
team members were used to identify and study instances where
owners, contractors, or suppliers had successfully developed or
employed innovative or atypical relationships within the EPC process.
Four principal conclusions flow from this effort:
1. There is both need and precedent for the development of a
step change to the EPC process that brings suppliers of
strategic components and/or systems for a project into the
circle of cooperation between owner and contractor.
2. The analysis of the questionnaire results showed that
suppliers were, in numerous cases, being used in an
expanded role with regard to status, time of involvement, and
expected role, but that business and commercial relationships
remained narrowly and traditionally defined.
3. The interviews conducted by research team members
confirmed pockets of innovation within the industry and
presented strong anecdotal evidence of reductions in time
and cost due to the early involvement of strategic suppliers.
4. The survey of associated industries showed that at least two
industries, the automotive manufacturing industry and the
micro-electronics construction industry, had improved
performance by expanding the role played by suppliers and
that many of their lessons could be transferred to the
mainstream industrial construction sector.
5
Defining a Breakthrough Delivery System Model
The research team was convinced that a step change to the EPC
process that would bring suppliers of strategic items and/or systems
into the circle of cooperation between owners and contractors was
both necessary and possible.
Discussion among the varied interests represented by the research
team membership led to a discussion during which the members came
to the following conclusion:
If one really desires to enhance the role of suppliers of the
most critical components and systems in a project, then one
must both enhance and prioritize the point of definitive
contact with those suppliers: the procurement process.
This led the research team to envision a project delivery system
that takes the big P for procurement in the EPC process and places it
before the E for engineering so that the technical knowledge and
expertise of major suppliers can be integrated into all phases of the
project from the beginning, thus PEC.
In recognition of this change and the fact that a number of non-
strategic procurement items would continue to be procured in the
traditional way (little p), the research team designated the process
PEpC.
This, together with the need to accommodate a variety of interests
and applications, led to the following broad definition:
PEpC (Procurement, Engineering, procurement, and
Construction) is an innovative project delivery system which
makes it possible to utilize key supplier expertise in all phases
of the project life cycle by developing an advance
procurement strategy and by actually reaching full commercial
and contractual agreement with suppliers of strategic
procurement items and/or systems prior to the principal
project engineering activities.
6
Refining the Breakthrough
The fundamental and essential characteristic of PEpC compared
with classic EPC is that procurement of the most project-critical
components is accomplished prior to all but the most preliminary
engineering efforts. (In this context, procurement means concluding a
full, complete, and binding contractual agreement between the buyer
and seller for one or more specified products and or services.)
In traditional EPC, procurement follows engineering, both
sequentially and in the fact that engineering specifies and defines the
items to be procured. In PEpC, the most strategic and project-critical
procurement transactions occur prior to detail engineering, and those
procured items then influence and define subsequent detail
engineering. More importantly, the suppliers of such project-critical
components are no longer passive compliers with specifications
generated by engineering, but can now play an active role in defining
their own contribution to the engineering and design process, as well
as those of other related and downstream suppliers.
The big P procurement in PEpC should not be confused with
early or advanced purchasing strategies frequently utilized in EPC
projects to deal with long-lead items. In traditional EPC, early purchase
of long-lead items occurs principally, and often solely, to preserve the
scheduling interests of the project. In PEpC, however, early
procurements are concluded with the principal intent of bringing
selected suppliers of project-critical components into the owner and
contractor circle of cooperation so that suppliers can more
effectively contribute to and influence downstream engineering and
other front-end activities and decisions, i.e., to deliver supplier core
competencies directly into the project delivery system and not
indirectly via the owner or contractor.
The idea of utilizing supplier knowledge and expertise in
developing project designs and specifications is certainly not new. Any
experienced engineering designer or specifier knows the value of
supplier input, just as any supplier representative knows the
importance of maintaining contact with engineering.
7
The problem traditionally faced by engineering specifiers has
been generating a suitable specification or design that is sufficiently
generic to maintain a competitive environment. Specifiers could
utilize some supplier knowledge and expertise in generating a
design or specification, but not too much lest they inadvertently
create the dreaded sole-source specification. Once a supplier is
finally selected, it is often too late, too time-consuming, or too
costly to take full advantage of the suppliers expertise, and thus the
opportunity to incorporate supplier-specific refinements, improve-
ments, or suggestions that could provide savings in time or cost, or
enhancements to quality is lost.
In PEpC, however, there is no impediment to the flow of
knowledge and expertise since the commercial relationship of the
supplier and purchaser has already been defined as the result of a
conclusive procurement transaction (a supply contract, purchase order,
or subcontract); and there is no longer a need to maintain a generic
engineering design solely for the sake of preserving a competitive
environment.
Procurement without Engineering?
How does one purchase the most important systems and
components in a particular project without an engineering design and
detailed specifications? PEpC does not banish engineering to the
hinterlands; in fact, PEpC actually creates new and challenging
opportunities that enhance the roles of both the engineering and
procurement functions in the project delivery process.
In a PEpC approach, the engineering function, based on the most
preliminary and conceptual of designs for a project, would identify the
strategic and project-critical systems and components. Instead of then
producing detailed designs and design specifications, however,
engineering would define the desired characteristics of those systems
and components in terms of their role or contribution to the overall
project objectives. Detailed engineering designs and design
specifications would be replaced with conceptual designs,
8
performance specifications, or even broader supplier services concepts
as the basis for procurement transactions creating opportunities for
suppliers to offer components, systems, and services which best
support the overall process or project objectives. Instead of low-bid
compliance with a detailed design specification being the basis for
procurement awards, PEpC allows broader and more comprehensive
evaluation criteria that ultimately measure the total value of a
suppliers offering, including the suppliers expertise and competencies
associated with its products and services.
PEpC also creates enhanced opportunities for suppliers to offer and
accept broader roles in the project delivery process. Depending on
their individual capabilities and competencies, suppliers can expand
their roles beyond the traditional ship the specified product to
include enhanced design responsibilities, installation, maintenance,
and even operation of their equipment in the completed facility.
Both engineering and procurement will be challenged to break
their traditional molds and generate procurement packages, and
associated evaluation criteria, that create and maximize opportunities
for suppliers to offer and deliver greater value and a broader range of
responsibilities in the overall project delivery process.
The Great Debate
Two major questions arose among the research team members in
their efforts to precisely define their new creation which led to several
vigorous and highly spirited debates:
First, does PEpC require that the procuring entity have or establish
strategic alliances or partnering relationships with the suppliers of
strategic components and systems?
The answer is no. The PEpC model requires simply that the
procurement of certain project-critical and strategic components be
accomplished prior to detailed engineering. There are many ways to
9
initiate and conclude a procurement transaction from the most
hard-nosed, low-bid, sign-the-killer-contract approach, to the warm-
and-fuzzy, we-trust-you, you-trust-us relationships.
The essential requirement in PEpC is simply that the procurement
transaction be consummated, including all of its commercial and
contractual details, utilizing the means and methods most appropriate
under the circumstances, while preserving the competitive technical
and commercial interests of the purchaser. Just as partnering and
strategic alliances have been shown to be of benefit in some traditional
EPC relationships, so too they may also be of value in initiating and
concluding the procurement transactions under PEpC. They are not
essential, however.
In this context, the role and value of the competitive bid process in
both traditional EPC as well as in PEpC were also examined. Managers
responsible for the fiscal interests of a project are often concerned
when supposedly noncompetitive procurement practices are engaged.
How do we know we are getting the best price? they ask.
As was mentioned, PEpC does not require the abandonment of
competitive bidding practices; it simply suggests that the basis of the
competition should be on a broader and more conceptual basis
focusing on a suppliers ability to deliver greater value to the project
rather than simply lower price.
Further, our infatuation with the competitive bid process may be
overvalued. A low bid to a fully defined detail specification is simply
the competitive market value for what was specified, or for what was
perhaps over-specified, misspecified, or not even needed. The
infamous $400 government hammer was the product of a competitive
bid process. The traditional competitive process based on detailed
specifications assumes that the specifier knows best and greatly
diminishes the opportunity for suppliers to contribute their knowledge,
expertise, and competencies in response to the purchasers true needs.
10
For the most critical, complex, and strategic components in a
particular project, the purchasers interests will often be better served
by exploring alternative methodologies which permit the developers
and suppliers of those components to assume a greater role in the
design, specification, and selection of components consistent with the
purchasers needs, expectations, and fiscal restraints.
Second, does a PEpC approach to a project imply that the
procurement of the most project-critical components, since it is
accomplished prior to detailed engineering, must be accomplished by
owners rather than contractors?
Again, the answer is no. If an owner has the capability, resources,
and experience to undertake the procurement of strategic and project-
critical items, and such items are central to a proprietary owner
process or a branded end-product of the facility, then the owner should
more likely be responsible for the big P procurement. If, on the other
hand, an owner does not have the capability, resources, or experience
required, or the strategic and project-critical items are integral to a
broader contractual responsibility assigned to an engineering or
construction contractor, then the contractor should execute the big P
procurement.
Defining the Benefits
Utilizing a sophisticated simulation model of the classic EPC
process, the research team was able to document and measure the
impact of a PEpC approach to project execution compared with
traditional EPC. In both theoretical and field implementations, the
results indicated that PEpC could produce savings in excess of 10
percent to 15 percent of the time and four to eight percent of the cost of
the traditional EPC process.
11
In addition to the measured benefits of PEpC, however, there are a
number of other benefits that may flow from the implementation of
PEpC and the enhanced supplier contributions it envisions. These
include:
Improved quality of the detail design.
Improved system and facility performance.
Earlier deployment of new technologies.
More equitable allocation of risk.
Improved utilization of supplier core competencies.
Reduction or elimination of redundant work processes.
Diminished need for owners or contractors to maintain non-
core competencies that are more effectively maintained and
delivered by suppliers.
Utilizing Core Competencies
As an essential ingredient in the discussion of optimizing the
relationships among owners, contractors and suppliers, the research
team examined the issue of core competencies. In doing so, it utilized
the CII publication, Owner/Contractor Work Structure: A Process
Approach (Research Summary 111-1). That publication identifies 30
competencies required for the successful execution of an EPC project.
A few are identified as essential or core competencies of owners,
others of contractors. The majority of the listed competencies,
however, were in the middle-ground, subject to what is called
structural alignment on a project-by-project basis according to the
unique demands of each project. Figure 1 illustrates the assignment of
a few competencies to either the owner or contractor, and the
unaligned balance in the middle.
12
The work of CIIs Owner/Contractor Work Structure Research Team
focused only on two entities, owner and contractor. The Reforming
Supplier Relationships Research Team attempted to expand that
discussion of competencies to include a third entity suppliers. If
suppliers of strategic and project-critical items are to be invited into the
circle of cooperation between owner and contractor, what
competencies do they offer? More importantly, what competencies do
they possess which might supplement or even displace competencies
currently maintained by owners and contractors? Finally, what core
competencies should a supplier possess as a minimum requirement for
admission into the circle of cooperation?
Ultimately, the 30 original competencies did not adequately
handle the additional considerations that resulted when suppliers were
added to the discussion. The research team identified six additional
competencies and then attempted to redistribute all 36 competencies
among the owner, contractor, and supplier entities. The results were
interesting, but inconclusive, indicating that to varying degrees, each
Figure 1. Owner/Contractor Distribution of Competencies
Contractor Structural Alignment Owner
Construction Lessons Learned
Maint. & Operability
Prelim. Design/Scope
Process/Concept.Design
Procurement
Project Controls
Project Management
Planning & Scheduling
Risk Management
Safety
Team Building
Technical Expertise
TQM
Alliances/Partnering
Benchmarking/Metrics
Commissioning/Startup/
Perf. Testing
Conceptual Cost Est.
Constructability
Construction Mgmt.
Convert Research to
Project/Scale Up
Definitive Cost Est.
Detail Design
Environmental/Permits
Field Quality Control
Legal/Contract Admin.
Business
Dev.
Financial
Approval
PM
Oversight
Setting
Project
Goals,
Objectives
& Priorities
13
entity could or should possess some element of nearly each of the
competencies. The competency commissioning and startup is a good
example: the project facility will be operated by the owner and,
therefore, the owner should have a significant role; so too should the
engineering and construction contractors who designed and built it;
and then consider the suppliers of the major system components who,
in many cases, will actually provide startup technicians for their
systems and equipment.
In an effort to resolve this dilemma, the research team attempted to
distribute the competencies based on which entity should take the lead
role in delivering the competency to the project. Here too, the results
were again inconclusive and prompted the conclusion that an abstract
attempt to permanently assign competency roles was not useful;
leading to assignments that were ambiguous, misleading, or disputed.
Ultimately, the research team concluded that assignments of
competency roles should be based on the particular needs of a
particular project, and the actual competencies of the actual project
participants.
Since many projects involve a single owner, a single contractor,
and numerous suppliers, the global assignment of competencies at the
project level is useful in establishing a general allocation of
responsibilities among the owner, the contractor, and the supplier
community. Specific allocations of competencies, however, can be
more meaningfully achieved in a system, sub-system, or component
context by focusing on the available competencies of the particular
supplier(s) involved.
Figure 2a provides a useful means of depicting a three-way
distribution of the various competencies utilizing a triangular
allocation. Competencies possessed or led exclusively by one of the
entities are in the respective corners, while competencies shared
between two entities run along one of the sides, and those
14
Maintenance & Operability
Performance Guarantee *
Planning & Scheduling
Preliminary Design/Scope
Price a Bid & Build to It *
Process/Conceptual Design
Procurement
Project Controls
Project Management
Project Management Oversight
Proper Equipment Sizing *
Risk Management
Safety
Setting Project Goals
Supplier Engineering *
Team Building
Technical Expertise
Total Quality Management
Figure 2a. PEpC Competencies and
Owner, Contractor, Supplier Competency Distribution
Alliance/Partnering
Benchmarking/Metrics
Business Development
Commissioning/Startup/Performance Testing
Conceptual Cost Estimating
Constructability
Construction
Construction Management
Convert Research to Project/Scale-Up
Defining Facility Requirements *
Definitive Cost Estimating
Detail Design
Equipment Manufacturing *
Environmental/Permits
Field Quality Control
Financial Approval
Legal/Contract Administration
Lessons Learned
Supplier
Competencies
Contractor
Competencies
Owner
Competencies
Supplier Contractor
Owner
Supplier/
Contractor Shared
Competencies
Owner/Supplier
Shared
Competencies
Owner/Contractor
Shared
Competencies
Owner/
Contractor/
Supplier Shared
Competencies
* Competencies added by Research Team
competencies properly shared by all three entities are in the middle.
Further, the magnitude of a particular competency, or the magnitude of
the role of an entity (supplier, contractor, or owner) delivering or
leading one or more competencies can expand or contract according
15
to the particular characteristics of a project and the entitys capabilities.
In an extreme implementation of PEpC, for example, where a project is
dominated by a few critical components that will be designed,
fabricated and installed by a supplier, the Supplier sub-triangle in
Figure 2b could grow, becoming more dominant in the project delivery
system, and perhaps displacing, to an appropriate degree,
competencies traditionally delivered by the owner or contractor.
Figure 2b. Potential Expansion of Competency Delivery Role
Contractor
Competencies
Owner
Competencies
Supplier
Competencies
16
3
Measuring and Quantifying Its Effects
Measuring the Unimplemented
Although the preliminary research indicated that the PEpC concept
offered the potential for significant reductions in project time and cost
compared with the traditional EPC process, the research team
recognized the need to validate these expectations by measuring and
quantifying the effects of applying the model. Because PEpC, however,
by definition involved new and fundamental changes to the traditional
EPC process, the difficulty of measuring the unimplemented was
encountered.
In order to document the expected benefits of PEpC, the research
team developed two different measurement processes, one theoretical
and one practical, that would permit the measurement of both the
expected ultimate potential of PEpC as well as provide practical
validation of those expectations based on actual project experiences.
The EPC Model
As a measurement tool, the research team adopted a baseline
model of the classic EPC process developed by the CII Information
Management Impacts Research Team (See CII Implementation
Resource 125-2, Determining the Impact of Process Change on the
EPC Process). That model consists of 164 activities, 16 milestones, and
12 major phases commonly found in conventional EPC projects. The
model includes a logic diagram that defines the sequence and logic
relationships between and among the 164 activities, and includes
detailed data defining the associated cost and duration of each activity.
The model can be manipulated to modify any of the activities,
sequences, relationships, costs, and durations. Utilizing sophisticated
computer modeling software, the research team was able to measure
and document the cost and schedule impact of changes to the
traditional EPC process.
17
Based on the methodology and definitions established by
Information Management Impacts Research Team, the terms cost and
time refer to the total costs and total durations of the engineering,
procurement, and construction processes, but exclude the cost of
procured materials and equipment.
Imagining the Optimum
Selected research team members were asked to envision a full-
scale implementation of PEpC in a particular project from their
particular industry or background. Each member then individually
reconfigured the baseline EPC model to reflect the implementation of
the PEpC concept in their particular project environment. This was
accomplished by examining each of the 164 activities, reordering them
as appropriate, and adjusting the expected costs and durations of each
activity. Each members modified model was then run through the
simulation program to determine the impact on total project time and
cost.
The results of 10 such theoretical PEpC implementations indicated
that savings ranging from 5.6 percent to 19.6 percent in project
duration and from 0.3 percent to 17.8 percent in project cost could be
expected from a full-scale implementation of the PEpC concept.
Comparison with the Real World
Next, the research team sought to test these theoretical
implementation results against actual field implementations of PEpC.
Although no full-scale implementations of PEpC were found (or were
even thought to exist), four projects were identified where partial
PEpC-like characteristics were implemented. These included:
A new paper mill for a major paper company.
A chemical reactor train project for a major chemical
company.
The expansion of a wood chip screening plant for another
major paper company.
18
A new bottling line installation for a major brewing
company.
In each of the four cases, one or more suppliers of the most critical
project components were engaged early in the project and generally in
conjunction with or just following preliminary conceptual engineering.
In all cases, the suppliers were selected based on expanded selection
criteria including their expertise with the components to be installed,
their willingness and ability to accept broader contractual
responsibilities, and their ability to contribute to overall project
objectives rather than low-bid to a detailed specification. In each case
the selected suppliers participated in the detail engineering phase of
the project, contributing cost and time-saving expertise, information,
and suggestions.
The benefits of the application of PEpC-like strategies in the four
projects studied indicate cost savings from zero to 6.6 percent, but
more significantly, duration savings from 5.6 percent to 18.6 percent.
Upon detailed analysis, the difference in the ranges of savings,
particularly the time savings, could be attributed to the aggressiveness
of the application of PEpC-like innovations.
Measurement Conclusions
Figure 3 compares the cumulative reductions in schedule
durations achieved in the theoretical implementations of PEpC against
the actual savings achieved in the PEpC-like project applications; with
both compared to the baseline of the EPC model. Three conclusions
are noteworthy:
1. The savings achieved in the four field implementations have
significant correlations to the aggressiveness of the
application of PEpC-like concepts.
2. The savings achieved in the field implementations are within
or exceed the savings range contemplated in the theoretical,
full-scale PEpC implementations.
1
9
Figure 3. Range of Time Savings from Theoretical Scenarios Compared to Case Studies
1 - Preliminary Feasibility
2 - Team Selection
3 - Preliminary Design, Est., & Scope
4 - Estimate, Schedule, & Review
5 - Procure Std. & Spec. Equip.
6 - Procure Fab. & Bulk Materials
7 - Detail Design
8 - Work Packages
9 - Preliminary Construction
10 - Field Construction
11 - Startup
12 - Documentation
5 0 5 10 15 20
Case Study 1
Case Study 2
Case Study 3
Case Study 4
Envelope of Savings for
Theoretical Implementations
20
3. In both the theoretical and field implementations, negative
savings, i.e., prolonged activity durations, are experienced in
the first three or four major phases of a project. These are
then recovered and exceeded in a positive fashion in the
remaining project phases. This is logically consistent with
both the envisioned PEpC concept as well as the frequently
quoted CII tenant that the early application of proven
beneficial techniques in a project cycle, even though
momentarily time-consuming, reap desirable downstream
rewards.
21
4
Implementation
The Challenge to Change
Little is achieved by simply identifying and defining a new process.
Results come from implementing change and achieving the anticipated
benefits. PEpC could be superficially dismissed with a, We already do
that. PEpC as envisioned and documented by the research team,
however, is a fundamentally different or breakthrough project delivery
system that, by definition, is not in current routine use. Thus leadership
and a firm commitment to explore innovative and promising
methodologies will be needed to sponsor a PEpC implementation, to
overcome the expected barriers, and to learn the important lessons that
can only come from real experience.
An Implementation Program
The PEpC concept is an innovative project delivery system that
modifies and reorders the sequence of several critical project planning
and execution steps of the classic EPC process. For this reason, the
implementation of PEpC must begin with and be incorporated into the
earliest pre-project planning processes of the project life cycle.
Figure 4 illustrates the five elements of the recommended PEpC
implementation process and how they relate to the traditional pre-
project planning process.
Implementation Steps
Familiarization and Awareness. Because PEpC really is a new and
different project delivery system, it will be necessary to ensure that all
involved parties owners, contractors, suppliers and, particularly,
members of the project team are aware of and understand the PEpC
concept. They must be informed and understand how it changes the
EPC process, re-allocates risks, and re-defines required core
competencies.
22
PEpC Strategy Development. A common product of the pre-
project planning process is the work breakdown structure. For effective
PEpC implementation, this breakdown should identify all major project
components and systems, which will make it possible to then:
identify the strategic procurement items and/or systems
critical to project success.
identify members of the initial project team who will lead in
the selection and procurement of each strategic procurement
item and/or system.
develop a detailed procurement and contracting strategy
suited to each strategic procurement item and/or system.
Figure 4. PEpC Implementation Incorporated into Traditional Pre-
Project Planning Phase
Familiarization and
Awareness
PEpC Strategy
Development
PEpC Execution Plan
PEpC Supplier
Selection
PEpC Commitment
Business Plan
Product Technical Plan Facility Scope Plan
Project Execution Plan
Contract Strategy
PEpC Implementation Steps
23
identify possible suppliers with the core competencies
required by the unique nature of the project and each
strategic procurement item and/or system.
PEpC Execution Plan. The execution plan builds on the previously
developed strategy and provides the guidelines and assurances needed
to contain risk and proceed with the process. The following steps are
required:
Obtain agreement and commitment to the PEpC strategy
from all project stakeholders.
Establish target cost and time baselines for each of the
strategic procurement items and/or systems.
Define the commercial and contractual terms to be used and
define greatest total value criteria for supplier selection.
PEpC Supplier Selection and Award. Supplier selection and award
follows on the development of the strategy and the execution plan. The
following steps are required:
Formulate and issue requests for proposals from identified
suppliers in a manner that invites and encourages suppliers
to offer products and services that provide the greatest total
value to the project and maximize the utilization of the
suppliers core competencies.
Review proposals relative to the established commercial and
contractual terms and evaluation criteria, and interview
potential suppliers.
Discuss and agree on core competencies and ensure that
roles and responsibilities are defined.
Refine and finalize appropriate contracting strategies, and
select and engage strategic suppliers.
24
Project Team Integration. An effective PEpC implementation
requires that owner, contractor, and supplier organizations must be
integrated into a single project team. The organizational considerations
needed for a successful implementation will require:
a clear definition of roles and responsibilities.
a strong focus on team building and acceptance of the fact
that firm functional boundaries are less important than
project team requirements.
addressing and managing a change, together with its
attendant fear and uncertainty.
Selecting the Big P Candidates
A pivotal task in implementing PEpC is identifying the strategic or
project-critical components or systems that should be procured in
advance of principal engineering activities. The characteristics of these
components and/or systems would include one or more of the
following:
1. System performance depends on a technology that is a core
competency of the supplier, or is unique or fast-changing.
2. System performance characteristics vary significantly from
supplier to supplier.
3. Delivery configurations vary substantially, and there is
potential for change in configuration.
4. The system and its associated components are highly
engineered and closely integrated.
5. The system or process is complex and there is substantial
potential for simplification or standardization.
25
6. Knowledge of system engineering, configuration, and
integration is a supplier core competency.
7. Design interfaces between the component or system and
other portions of the project are complex, variable, and
subject to interpretation.
8. System or component sizing, configuration, and selection are
critical to the principal engineering activities.
9. System or component design can influence principal
engineering activities.
10. Lead times for system or component selection, design, and
delivery are long with strong dependencies in the overall project
schedule.
27
5
Recommendations
In concluding its work, the research team offers the following three
recommendations.
1. Based on the positive results documented in its study of the
PEpC concept, the research team recommends that full-scale
implementations of PEpC be undertaken:
in accordance with the implementation guidelines
provided; and
in instances where suitable champions of innovation
can be relied upon to find opportunities rather than
barriers, to maximize the benefits to be derived from
this promising new approach to project execution.
2. The PEpC concept as presented should be the subject of
further measurement, study, and refinement through industry
implementations.
3. CII and its member companies should continue to explore,
expand, and develop its focus on the supplier community
and on enhanced supplier involvement in the capital project
delivery process.
29
6
Postscript
Is PEpC a Breakthrough?
One might conclude that the suggested reordering of the core
elements of the traditional EPC project delivery system would
automatically qualify for breakthrough status. In some preliminary
presentations of the PEpC concept, however, the research team
received a number of we already do that reactions. So, at the risk of
redundancy, let us review the essential elements of PEpC:
The research concludes that to implement a PEpC project delivery
system one must:
identify the project-critical components in a project prior to
all but the most conceptual project engineering; and then
consummate commercially-complete transactions to engage
the most project-favorable suppliers of those components
(according to project-specific selection criteria); for the
purpose of
facilitating the delivery of those suppliers core competencies
into the project delivery process, including the suppliers
ability to accept broader roles in project execution and risk
management; and thereby
influence, define, and benefit the overall project execution
strategy and the detail engineering effort; and
that this process should be undertaken strategically,
deliberately, and consistently.
30
The research team is hesitant to claim that a PEpC approach to a
project has never been utilized. Many of the done that examples,
however, were actually instances of what the research team identified
and documented as PEpC-like applications. In fact, the research team
utilized a number of these PEpC-like project examples in its
measurement and validation process. These were, indeed, innovative
variations to the traditional project delivery process and were, in most
cases, successful and beneficial in terms of their cost and schedule
impact; and the research team infers no diminishment of the
innovation and value of these efforts.
The research team, however, found no situations where a PEpC
approach as defined above was utilized strategically, deliberately, and
consistently (with the possible exception of the Nucor approach
documented in CII Research Summary 112-1, 2% Engineering Can It
Work for You?). In many cases where one or more key suppliers or
components were selected early, often as a means of providing some
anchor points for detailed engineering, or to select a particular
proprietary supplier technology, the definitive commercial transactions
were concluded later in the process. In other cases, supplier selection
arose from the use or re-use of new or pre-existing supplier
relationships. Finally, some of the examples of early supplier selection,
although beneficial to the detailed engineering effort, were really
initiated out of schedule considerations.
Again, all of the PEpC-like applications were valuable and
innovative variations of EPC. The research teams concept of PEpC,
however, suggests taking these innovations even further, perhaps to the
point where the reaction is We cant do that as opposed to We
already do that, and to the point that a PEpC concept is commonplace
rather than anecdotal.
31
So, is PEpC a breakthrough? The research team believes that it is.
But that decision is ultimately left to the reader and the readers use of
this research effort. PEpC is only a breakthrough if it is applied and
implemented as a breakthrough and prompts the practitioners of
traditional EPC to dramatically change the way suppliers of the most
project-critical components are integrated into the project delivery
process.
The research team urges the industry to stretch its view of the
supplier community, to find ways to maximize suppliers contributions
to traditional EPC projects, and at the same time, to stretch the supplier
community to become more participative in the design and execution
of EPC-type projects. The research team believes that a PEpC approach
to project delivery is an effective tool in achieving these objectives,
and believes that its research documents the benefits such a process
delivers.
33
References
Sullivan, G. R., Yupari, M. A., and Anderson, S. D., Owner/Contractor
Work Structure: A Process Approach, A Report to the
Construction Industry Institute, Research Report 111-11, Austin,
TX, 1997.
Vorster, M. C., PEpC: A Breakthrough Project Delivery Sytem That
Improves Performance by Reforming Owner-Contractor-Supplier
Relationships, A Report to the Construction Industry Institute,
Research Report 130-11, Austin, TX, 1998.
Reforming Supplier Relationships Research Team
Robert J. Anderson, Hoechst Celanese
Gary Beachman, Weyerhaeuser Company
Donald A. Ben, Anheuser-Busch Companies, Inc.
John G. Berra, H. B. Zachry Co.
Larry Cessnun, Hilti Corp.
Robert E. Fielitz, DuPont
Jamie Fowlkes, Rohm and Haas
John E. Futcher, Bechtel Corp.
Philip G. Luzier, Champion International
Frank B. Lynott, Honeywell, Inc.
Mark A. Meek, QuikWater
* Edward M. Ruane, J. A. Jones Construction Co.
James A. Scotti, Brown & Root, Inc.
James E. Steenbergen, Union Carbide Corporation, Chairman
Michael C. Vorster, Virginia Tech
* Principal Author
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