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Technology, Tight Budgets Drive Project Delivery Trends
Now more than ever, industrial owners are looking to establish a thorough project definition with a credible cost of delivery as quickly and cost-effectively as possible. As a result, project delivery methods and technology are constantly evolving to meet those needs.
Engineer–Procure–Construction Management (EPCm) at- risk delivery is strengthening an already solid foothold in the industrial manufacturing markets. At the current rate, it is expected to become the leading delivery method very soon.
At O’Neal, we work very closely with many Fortune 100 company and large international manufacturing companies. The capital approval process has become more stringent and drawn out as corporations face smaller and less forgiving capital budgets. Project managers do not have the latitude for design and cost development that the traditional DBB process requires. Owners and project delivery teams are developing contracts that can appropriately address project risks and allocate them in the most cost-effective manner. As a result, contracts have become very creative in incentivizing efficient project delivery, schedule and cost control.
Realistic project definitions and “go to market”-based cost estimates are the new norm. There is a trend within EPCm at-risk delivery in which the owner and project delivery firm use an “open” book approach to establish a Gmax project cost, where the firm is compensated on a cost-reimbursable basis up to a guaranteed maximum price.
Owners not only have less project and construction support on their bench but they also have limited purchasing and procurement capabilities when it comes to project procurement needs. EPCm at-risk delivery ensures that at least 90 percent of the project is competitively bid. The owner can manage their involvement to be as much or as little as they like as the project is being bought out and delivered.
The biggest trend driving the industry across the market is the use of technology, specifically building information modeling systems. BIM technology allows design, procurement and construction experts to effectively work collaboratively at the onset of the project development. The technology is bringing the true benefits of design-build together at the onset of the project where it can pay the biggest benefit to both the owner and the project delivery team. At O’Neal we are also using tablets in the field to ensure our construction managements have real time access to the latest engineering drawings and construction documents.
Professional management firms, including real estate development and management firms, have become considerably more visible in project delivery. This is not necessarily because owners’ approaches are changing; it has more to do with current economic realities facing development/management firms. Prior to the recession, these firms were completely focused on the commercial financing and lease-back deals that were prevalent in the industry. In the current market, these are non-existent. To replace those large fees, the firms have to focus on project management and facility management, and these services are now being marketed to owners at a much lower cost than what was seen as recently as two years ago.
Meanwhile, it is becoming more popular for EPCm at-risk and DB companies to serve as the owner’s program manager. This role was once predominantly made up of specialists and architects. However, owners are requiring that program managers demonstrate significant acumen in developing project scope and cost. Thus, traditional program managers are being replaced by firms that have proven processes, systems and software to support the project development and project delivery phases.
At O’Neal, we are using an EPCm at-risk approach in working with Mitsubishi Electric Power Products to build a $230 million transformer manufacturing plant in Memphis, TN. Mitsubishi was very interested in keeping all phases of design and construction with one company to successfully complete the project and meet their production and product delivery requirements. O’Neal began working with Mitsubishi during the site selection phase. By utilizing the EPCm at-risk approach, O’Neal was able to help Mitsubishi reap the benefits of having clear project definition, enabling them to negotiate and develop their project funding model very early in the process.
This approach is also gaining acceptance in the pharmaceutical market and has been very visible in the institutional and university market. The University of Georgia is among a group of Georgia-based higher education institutions that have launched a design-build delivery program for specifically targeted projects. Other universities and colleges are beginning to adapt this concept as they learn to incorporate features into the design-build model that insures competitive bidding and minority subcontractor participation.
Preconstruction Improves Project Delivery
Early definition of capital projects is critical for successful project delivery. Preconstruction services can provide owners with a formal approach for developing and executing capital projects. O'Neal's preconstruction approach defines the project scope, schedule and cost as early as possible to enable the most efficient use of resources and money. Ultimately this process helps the owner determine if the project is viable or not.
The preconstruction process offers value to our customers through project definition while reducing risks. By scheduling a formal review, owners are better equipped to make informed decisions about their capital investments.
"Many of our clients use our preconstruction process as the basis for their capital project appropriation process," said Eldon Gowens, Manufacturing SBU Leader for O'Neal. "Most importantly, it gives the owner a defined basis to make an informed decision. The preconstruction process takes out many of the unknowns of a project and reduces risks for the owner."
The main outcome of a preconstruction project is a firm project scope, schedule, and cost estimate for the owner. O'Neal utilizes preconstruction to help clients with a formal review of a capital project. The process evaluates the constructability of the project, provides a formal review, and identifies opportunities for value engineering. O'Neal can also provide the owner with a number of deliverables, including an execution plan, risk analysis, and a procurement plan.
"Our preconstruction efforts have a significant impact on the overall project," said Gowens. "Since we determine the cost and schedule of the project upfront, we can reduce the number of changes, unexpected costs, and variations of schedule during the project; we can identify early where possible problems will occur and mitigate risk."
Capital Project Delivery Trends
As the economy continues to recover, owners are taking different approaches to delivering capital projects. Kevin Bean, O'Neal's President and CEO, discusses capital project trends in the industrial markets.
What trends do you see emerging in industrial markets?
The biggest trend is the speed with which the industrial and process markets have rebounded. The growth is primarily being fueled by private sector investment. These companies are investing part of the capital reserves they have built over the last couple of years. As a result, these owners are looking at very aggressive time to market schedules.
This industrial rebound has also created a rush of companies into this market. Owners are now faced with the challenge of vetting out the proven industrial project delivery firms and those firms wishing to get in to a very specialized market and jump on the learning curve.
New projects are not necessarily "greenfield." O'Neal continues to see the owners looking to redeploy existing manufacturing capacity through upgrades and consolidation. This is a large part of our business and will continue to be into the future. So much so that we are developing a specific business unit to address equipment relocation and process equipment installation to meet the growing demands.
The majority of the clients are self-funding the capital projects, which is a double edged sword for project teams, client project managers included. The ability to develop projects with accurate cost and a well defined scope puts time and financial constraints on the project team the during project development and capital request phase. Clients want to spend as little as possible, while establishing the cost as quickly as possible. However, once the funding package is submitted for capital approval, the process is routinely being drawn out due to the increased scrutiny and review by corporations and board of directors.
If the project is approved, its funding package is based on costs that are sometimes 3-6 months old and an overall project schedule that has now turned critical or "fast-tracked." Lastly, once a corporation makes the decision to execute a project, they hope to begin reaping the profits from the project as quickly as possible. Project teams live in a Fast-Slow-Now world. Out of necessity, owners are always looking to different project delivery methods for their capital investments in projects.
How are owners' approaches to project delivery changing for capital projects?
Now more than ever owners are looking to establish a thorough project definition with a credible cost of delivery as quickly and cost effectively as possible. Engineering-lead Engineer-Procure-Construct (EPC) is becoming more prevalent and popular. The traditional approach of spending between 1 ˝ % to 3% of a projects total installed cost on a pure design study that includes a +/- 30 % cost estimate is not sufficient for the new capital approval process required by corporate executives.
Economic Trends in Manufacturing and Construction
What are your thoughts on the economic recovery?
The recovery is not coming as fast as everyone would like it to come. However, we are seeing some very encouraging signs and we believe that momentum is building for integrated EPC firms. Companies with solid balance sheets have been sitting on the sidelines, waiting for an opportunity to leverage their market position. The number of companies looking at building new facilities and expansions is steadily increasing. We are engaged with a number of firms that are early in their capital process and are evaluating potential sites.
Are there certain industries that are investing more than others?
We've seen an increase in activity across all sectors. Manufacturing, chemical, automotive and aviation have had an increase in activity. Companies that manufacture products for the energy industry are focused on adding or expanding facilities in the Southeast. Suppliers of components for the solar and wind industries have been very active. Advanced material and battery manufacturers have also been looking at investing capital. We have seen more traditional long time manufacturers jumping in as opposed to smaller start-up companies.
O'Neal is very involved in Economic Development, describe your mission?
Economic development has long been part of our efforts here at O'Neal. We've have individuals that focus exclusively on working with companies considering building new facilities or expanding their existing operations. We work closely with site selection firms, consultants, and economic development officials. Ultimately, we want to help our clients through the process of building or expanding their operations, and we strive to make that process a easy as possible.
As a company, we believe we have a role in contributing to the economic prosperity in the communities in which we operate. We can be a tremendous help to the economic development process by leveraging our process and manufacturing expertise. It has been our experience that owners need help in identifying their total investment including manufacturing and process systems, not just the site and building component.
O'Neal has a proven process for helping prospects arrive at the total "all-in" cost being considered quickly and very cost effectively. This helps the client make informed decisions and ultimately keeps the economic development process moving along. Often times with our help communities are able to identify additional incentives and benefits that help the project move forward.
Integrated Project Delivery
Collaborative approaches to capital projects delivery are becoming more critical to project success. Shane Bolding, O'Neal's vice president and Industrial Manufacturing SBU Leader, discusses how Integrated Project Delivery (IPD) is impacting the industry:
Q: What is integrated project delivery?
A: Integrated project delivery is a collaborative delivery system where the owner, design team, estimating, procurement, construction team, suppliers and others all work together from the beginning to optimize project results, increase value to the owner, reduce waste, and maximize efficiency. With this approach, everyone has input and a stake in the project. The project team is aligned from the beginning with common goals, tools and information sharing.
Q: What trends are you seeing in how industrial and manufacturing projects are being delivered?
A: Speed to market is starting to make a comeback in the industrial/manufacturing markets. Owners/manufacturers are once again wanting to start-up faster and beat their competition to market. Many are companies entering new markets, especially international companies wanting to continue buildout of their global footprint. These companies want to work with someone they can engage early in the planning phase and use them throughout their capital expansion program.
Q: What are the advantages for the client when the facilities and utilities are integrated into the manufacturing operation?
A: In a manufacturing operation, production efficiency and quality are the goals that manufacturers have to meet for their customers and their contracts. Facilities exist to support the manufacturing process and the employees that make it run profitably. An integrated approach aligns manufacturing process and facility design from the beginning. That way you don't end up with a facility that doesn't fit your needs.
Q: How can an EPC firm help owners through this process?
A: An EPC firm, such as O'Neal, Inc, has an integrated staff that includes engineers, estimating, procurement and construction professionals who can help with front-end planning and develop a road map for a successful project. This planning can include help with process design, facility, utilities, site analysis, cost estimating, procurement planning and sourcing, operations, and even maintenance and facilities management planning. The owner always benefits from this planning whether they use internal resources or an EPC firm. The important thing is that a qualified team with relevant expertise is engaged early to establish a viable plan for delivering the project.
Defining Project Cost, Scope and Schedule
O'Neal's preconstruction approach is driven by our proprietary Capital Appropriation Process (CAP). CAP is based on research efforts by the Construction Industry Institute (CII) and our 38-year history of working in our clients' capital processes. It includes industry-recognized best practices for engineering, procurement and construction efforts for capital projects.
"By using CAP, owners receive a thorough front-end assessment of their proposed project and where there is specific risk to success - especially from a design and cost standpoint," said Jeff Hall, Vice President and Process Chemical SBU Leader with O'Neal. "The process also helps us understand an owner's approach, thought process and critical items when executing capital projects."
Along with our CAP, O'Neal uses the Project Definition Rating Index (PDRI) to access project risk. PDRI was developed by CII as a scope readiness tool. It is a weighted scoring system that evaluates all aspects of a capital project. CII developed the assessment based on research of over 25,000 completed capital projects.
O'Neal's CAP Process focuses on project development and delivery models that exhibit the following characteristics:
"We have found the PDRI to be an excellent tool in parallel with our Capital Appropriation Process for working with clients to develop scope, cost and schedule for their capital funds request," said Hall. "The PDRI provides an effective risk assessment for both our clients and O'Neal."
- Every potential project is viewed as an opportunity for savings.
- Capital is directed toward the areas that best benefit the organization's overall goals.
- Stakeholders are included in the front-end loading process at the appropriate times.
- Each step in the capital process is connected to and builds on the previous step.
- Long-term requirements are considered at the front-end of a project.
- "Gates," or review processes, occur throughout front-end loading. Projects must meet owner-established criteria at the beginning of the project in order to move forward.
O'Neal's goal is to develop a comprehensive project scope and definition package as quickly and cost-effectively as possible. This allows owners to spend upfront capital wisely and make critical project decisions early. For O'Neal, this process enables us to guarantee project cost and schedule, but most importantly, align owners' expectations with the correct project definition.
Project Delivery Methods
While there are many project delivery methods available, choosing the appropriate strategic approach to project delivery varies by project.
"Selecting the right project delivery method is crucial for successful project delivery," said Brian Gallagher, Vice President, Marketing with O'Neal. "When we get engaged early in the process, O'Neal can help our clients select the right project delivery method based on their internal resources, goals and objectives, schedule and budget, and utlimately deliver the project on an Engineer-Procure-Construct (EPC) basis."
The project delivery decision should be based on a number of factors including budget, schedule, cash flow, project complexity, risk mitigation, project team composition and project goals. Essentially, a project delivery method is a configuration of roles, relationships, responsibilities, and sequences on a project. Here is a brief overview of some of the typical project delivery methods.
DBB is a common project delivery method in the manufacturing industry. Owners with sufficient in-house staff contract with different entities for each phase of design and construction, and take on the responsibility of orchestrating the various team members. Each step in the execution process follows the other with minimal overlap. Under this approach, the owner functions as the overall project manager and hires external engineers, consultants, and contractors.
DBB is typically used when the project is not well-defined and there is adequate time for the design and construction phases. These projects are often competitively bid and priced as a lump sum. The competitive nature of the bidding process usually results in a competitive cost for the owner, but the quality of the subcontractors is left to the general contractor.
Under this method, all construction and performance risks are assumed by the GC. Change orders and schedule delays can occur if the owner's intent for the scope of work is not well-defined by the architect to the contractor.
The DB model is suited for projects that require fast-track delivery. The contractor and designers are hired by the owner to deliver a complete project. The owner selects a DB firm, which retains its own architects, engineers, and consultants. The DB firm is typically responsible for preparing the estimate and scope, as well as producing all construction drawings, details, and specifications.
DB contracts are typically lump sum and based on the design that accurately meets the owner's requirements. The owner may be given a guaranteed maximum price.
DB is utilized to reduce the delivery schedule and often enhances communication and raises accountability. The DB approach is well-suited for larger, less complicated, time-sensitive projects where the owner has a clear project definition and concept prior to soliciting bids and desires a firm price to be confirmed early in the process.
Construction Management (CM)
Under the CM method, the owner retains a firm to act as its construction management representative. There are a number of variations on this model. An architect is retained to develop a design package. The CM is retained for a fee and is responsible for managing construction while meeting goals in terms of quality, scope, cost, and schedule.
The CM representative is also responsible for estimate development, construction, subcontracts, scheduling, reporting, quality control, and cost controls. Then architects, engineers, and consultants are retained to develop a program. Multiple construction packages are developed, and bids are solicited from various trades. Under the CM method, design and construction activities overlap.
This model is well-suited for owners that lack in-house design and construction expertise or capacity. It ensures consistent oversight and careful monitoring of costs and schedule. However, this method can result in additional upfront costs and create communication challenges among the team.Engineer-Procure-Construct (EPC)
EPC has emerged as a preferred choice of project delivery for many industrial manufacturing, process chemical, and pharmaceutical projects. Under this model, the EPC firm handles design, procurement of all equipment and construction materials, and construction services for complete delivery of the project, usually at a lump sum price. The EPC process starts with a preconstruction effort that involves some preliminary planning and engineering to define scope, schedule, and costs of the project. The EPC firm has complete responsibility for the project from start to finish.
The project schedule and project budget are known at the start. All scope, cost and schedule risks are passed to the EPC contractor. EPC project delivery offers the tightest integration of activities during the construction process through a structured and disciplined approach. In addition, communication among the design, procurement, and construction teams begins immediately.
The EPC model helps align team members for optimal project performance. EPC delivery is typically used for process or equipment-driven projects. This model reduces risks for the owner, delivers predictable results, and maximizes the effectiveness of capital planning.