From Engineering Consultant to EPC Contractor
In this essay I intend to offer suggestions for the smooth transition of engineering consultants to EPC contractors.
Countries are resorting more and more to National Content, Local Content, Indigenization, or similar policies, in a bid to maximize the benefits of their natural resources to their citizens.
For instance, the Nigerian Government recently announced that construction of $4.3bn NLNG Train 7 will be undertaken by local companies, as opposed to previous practices whereby major equipment or components were fabricated or preassembled abroad and shipped into the country for installation.
Consequently, more and more local and, in some cases, international design consultants, are transitioning from engineering consultancy to EPC contracting, to increase their share of the project pie.
However, this forward integration has come at great costs to some. Many have burnt their fingers in the process because they assumed that managing an EPC contract is the same as managing engineering design. That is taking naivete to ridiculous heights!
According to the International Project Management Association (IPMA), EPC Projects are typically large and complex. Delivering EPC Projects is tough. Ultra large projects represent an exponentially tougher challenge than a typical mega project.
Part of the challenges, beyond those engineering consultants are already familiar with, include market entry barriers, interface challenges, lack of construction experience, poor construction estimating, cultural and language problems, etc. This is even more so for large EPC projects that may cut across jurisdictions requiring managing different, if not conflicting, construction requirements, labor relations, etc.
Construction contract risk management is another major problem area. It should be understood ab initio that all contracts are essentially risk management strategies – either for sharing or transferring risks. Project owners use contracts to transfer or share project risks that they assume EPC contractors are better equipped to manage. Otherwise, they would just hire resources and execute the project themselves.
It is therefore confounding why an engineering consultant would step forward to assume risks by way of an EPIC contract that it has no experience in. “If you can design it then you can build it”, is far from the truth. Design and construction are two different animals!
I know of a design consultant who was awarded a turnkey project. They just hired some construction personnel and added to their staff, without any effort at team integration and training. And, in their own opinion, were ready for construction! They were dead wrong. Well, when the contract completion date arrived, they were yet to place order for some major equipment!
I have also seen maintenance contractors and equipment manufacturers get their fingers burnt in EPIC contracts just because their equipment was a major part of the project scope.
In many cases, the problem starts with putting the EPIC bid together. More often than not, major scope items are not priced because of lack of requisite competency in-house. In this days of ‘lowest bidder’ the lowest bid wins the contract, especially when the owner has not done a thorough job during bid evaluation.
It should be understood that one is not implying that engineering consultants cannot transition into EPC contractors. Far from it. Many have already accomplished that. Some achieved the feat at very great cost by learning from their mistakes.
My contention is that the process of transition can be less painful and costly if it is planned and managed very carefully. From what one has seen around, that has not been the case. Presumption and overconfidence seem to be the primary guiding principle.
One wise consulting organization hired a consultant to walk them through the process of transitioning from design consultancy to EPC contracting. That has not only saved them reputation damage through poor performance and financial lose. It has reduced the learning curve.
What are the issues to consider in transitioning from engineering consultant to EPC contractor?
- Mental Shift from thinking like a consultant to thinking like an EPC contractor. I would only suggest that the engineering consultant discuss EPC contract execution with a successful EPC project manager over lunch. That would be apocalyptic! I bet he would find out that they are worlds apart in their mindset and approach.
- Treat the transition as a completely new market entry project. Begin by conducting SWOT, PEST, and PESTEL etc. analyses as necessary.
- Train existing staff in relevant aspects of EPC contracts: Fundamentals of project management, Contract Types and associated risks, Client organization structure and associated risks, Contractor organization structure and associated risks, Bid team options and associated risks, etc.
- Hire competent hands to jump-start the team. I need to warn at this point: experienced construction professionals will cost far more than consultant’s existing personnel with similar qualification and year of experience! Cost serving should not be the primary consideration at this stage. It would only cost you more down the road.
I remember supervising an inexperienced EPC contractor many years ago. I advised to hire competent hands to fill critical positions and drive project execution. But he insisted on using existing staff with minimal skills for that size of project. It resulted in dismal performance, dissatisfied client, loss of patronage, and insolvency. You would say, “Penny wise, pound foolish”.
- Develop strategies for market entry. This may include strategic alliances, M&A, etc. Of course associated risk of each option must be managed efficiently.
In going from engineering consultancy to EPC contracting the issue of greed must be avoided at all costs.
First the desire to take advantage of, or exploit, a strategic partner must be addressed. This is the major risk of strategic partnership. Even when terms and conditions of the partnership are clearly outlined in the strategic partnership contract or memorandum of understanding (MOU), integrity is still a major risk factor.
Some have discovered to their chagrin that their partner had used them to build database, gain experience, fleece them, poach their experienced staff, and walked away. How unscrupulous men can get!
Second is the greed of going for mega projects for a start. This is ‘testing the water with both feet’. Grow gradually and learn as you go. Do not over-extend yourself. Some contractors have collapse under the weight of a heavy portfolio of projects. There is no need to amass all the contracts today; there will be still bigger ones tomorrow. That might sound counter-intuitive but I will leave it at that.
In conclusion, transitioning from engineering consultant to EPC contracting might be a last ditch effort at survival in some climes. But that process must be carefully managed. Otherwise, one would end up jumping from frying pan to fire. Paying attention to the issues raised above might be the difference between life and death for your organization.
Healthy challenge or debate is welcome.
