W5_FELIX_SELECTING CONTRACTING STRATEGY USING DECISION TREE

1)      Problem Recognition, Definition and Evaluation

In this time I would like to analyze the best contracting model for my EPC project i.e. NPU H2-Rich Gas Recovery.

The scope of the project is to design Burner tip replacement, Interconnecting Pipeline, procure and install chloride treater, and new fuel gas mixing drum.

The value of the project is estimated around 10 million dollars with 2 years estimated duration.

The objective of this topic is to find out what the best contracting model for my project?

2)     FEASIBLE alternatives

Base from McKinsey analysis, there are two contracting model i.e.:

a.       Option 1 : EPCM (Engineering, Procurement & Construction Management).

On an EPCM project, the EPCM contractor provides engineering, procurement and construction management services, but the employer directly employs construction contractors (sometimes called trade contractors) to build the project. The EPCM contractor usually manages the construction contractors for the employer. On one analysis, the EPCM contractor is more like a professional consultant than a contractor, providing design and construction advice (rather than building the project itself).

b.      Option 2 : EPC (Engineering, Procurement & Construction) contractor

An EPC contract is a design and construct contract where a single contractor broadly takes responsibility for all elements of the design (engineering), construction and procurement. The EPC contractor manages and owns the contract for Engineering, procurement and construction services on behalf of owner.  Think Design & Construct style contracts, where the project is largely Contractor managed and the cost risk and control are weighted towards the Contractor and away from the Owner.  The EPC contractor has direct contracts with the construction.
EPC Structure 

EPCM Structure

3)     The outcomes for each feasible alternatives

a.      EPCM (Engineering, Procurement & Construction Management)

Benefit             :   Cost –if EPCM works well it is the lowest cost method, because the  risk contingency may not need to be utilized

Control/flexibility –design changes can be accommodated with potentially less cost and delay

Insolvency and performance failure risks are spread

Disadvantage : More risks retained by the owner

Owner's later package choices may be limited by earlier decisions

Significant demands are placed on the owner's skills and resources (the EPCM contractor may have conflicts of interest which require management)

Complex documentation

Financing options are limited

EPCM works best within established relationships between experienced parties

b.       EPC (Engineering, Procurement & Construction)

Advantage   :The contractor bears the risk of integrating the performance of all package contractors, including designers

Time –the execution project already fix and agreed at the beginning contract

A high degree of certainty (on paper) can therefore be attained as to cost, time and quality

EPC procurement is widely used and understood and is the most "bankable" procurement method

Disadvantage : Cost –contractors will add a substantial risk premium to the price

Control –the contractor controls the detailed design and construction process

Quality –the contractor will aim for the minimum compliant standard

Claims –contractors are motivated to make claims to alleviate risk transfer.

4)     Selection of the acceptable criteria.

a.       Cost to owner

b.      Execution Duration

5)     Analysis for the alternatives

Based from my company experience we can assumed if EPC contract will take 100% budget, than EPCM will take 10% lower or 90% cash from budget.

Contract duration will take 2 years.

EPC contract with his own control probably 80% can be finish on time while EPCM only 10% on time.

If we chose EPC contract and not finish as per schedule assumed delayed 1 year than Company will take maximal LD 5% from the contract, while EPCM if finish on schedule than company will give incentive bonus to EPCM $0.5 million.  The probability for EPCM on time is predict only 10%.

Annual income per year estimated at $2 million. The after tax MARR is 15% per year. Analysis period = 9years. 

 

 

6)     Select the preferred alternative

Base from above analysis E(PW) for EPC is higher than EPCM, so EPC is give more advantage for my project.

 7)     Performance Monitoring & Post Evaluation of Result

This result will be submit to the management and the result will be reported at the end of the year.

 8)     Reference:

i.            PLC Construction                                                         

         http://construction.practicallaw.com/blog/construction/plc/?p=253

ii.           Decision Tree Tutorial in 7 minutes with Decision Tree Analysis & Decision Tree Example (Basic)

         www.mbabullshit.com/Share

iii.          Decision trees f

         http://www.mindtools.com/dectree.html          

iv.          Engineering Economy

        William G. Sullivan, Engineering Economy, Fifteenth Edition, 2012