Study on the Optimization of the Bidding Program of the EPC

Engineering Project
LIU Hongyong, HAN Neng, HAN Xia
Southwest Petroleum University, Chengdu, China, 610500

Abstract This article has provided a detailed analysis of the contractors unbalanced bidding strategies
and the two evaluation methods currently used in project evaluation process in China, including the
method of comprehensive evaluation and the method of winning bid at the lowest price. Likewise, based
on the difference in the time of contractors engaged in the project, contracts, the time of constructions,
and the scope of the owners rights between EPC Engineering and Chinese traditional engineering, the
article has proposed the theory and method of value engineering (VE) at the tendering stage to
contractors, used the life-cycle cost approach and the decision tree method to select the program object,
applied the direct functional assessment approach to calculate the function value coefficient, exercised
the value index method to calculate the function value, and finally selected the projects, which Vi is less
than 1, to optimize.
Keywords: EPC, Bidding, Value Engineering

Currently, the international engineering contracts and awards market is bearing various kinds of contract
models, but is increasingly inclined to use the EPC contract format, namely the
engineering-procurement-construction, to contract and award the large scale engineering projects[1].
First emerged in Japan in 1980s, the EPC program has been favored by many owners after introduced to
America and has gradually expanded its influence in the international engineering contracts and awards
market due to the early determination on the investment amount and construction cycle. In China, there
is also an increasing amount of engineering programs constructing in the way of EPC.

1 The bidding and tendering under current Chinese engineering model

1.1 The contractors bidding strategy under current engineering contract model
Most of contractors take unbalanced bidding strategies. In the way of Chinese traditional engineering
construction model, contractors take responsibilities only for the construction of projects, and the
program was settled on the unit-price (total price=unit price * quantity in the bidding document).
However, in fact, the project quantity was settled on the basis of real quantity. Owners always provide
detailed construction drawings and prospective design reports when bidding. On the basis of existing
materials, the experienced contractor is able to quote in accordance with the Bill of Quantities. Normally,
contractors quote an unbalanced bidding to achieve the goal of cost efficiency, which is, after
determining the total price of the project, adjusting the price of each segment in business tenders of the
tender book according to terms of payment; collecting project funds as soon as possible and minimizing
investment risks without raising the total price. Constructors only take emphasis on lower quotation,
regardless of the connections between program designing, purchasing and construction.

1.2 Current bidding evaluation methods

Two kinds of bidding evaluation methods are currently used, which are the method of comprehensive
evaluation and the method of winning bid at the lowest price.
1) The comprehensive evaluation method is to make a comprehensive evaluation for the bidding entities
and the bidding document and to record the result in quantization. Several factors are considered when
carry out the evaluation, such as the biding quotation, technical proposals (e.g. the bidders responses to
the tendering files, designs of construction, project duration assurance, quality assurance, security
guarantees etc.), business proposals, and reputation of contractors (e.g. qualification levels of the bidders,
achievements of project managers and the performance of construction, etc.). The total score of each

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bidder equals the sum of each factor score multiplied by different weights, and the owner of the highest
score wins the bidding. However, its difficult to quantize the reputation of contractors.
2) Method of winning bid at the lowest price indicates that the bidding document can satisfy the
substantive requirements of tendering document and be the lowest among all analyzed and judged prices,
but not applying to the condition that the bidding price is lower than the cost of entities. The bidding
price which is the lowest among evaluated prices is not always the lowest one in bidding quotations.
However, it is difficult to define whether the bidding price is lower than the rational price of costs.
Evaluated price is the quantitative indicator represented in currency format and used for measuring the
competitiveness of bidding. Apart from the price factor, designs of construction, quality assurance,
projects duration, previous experiences of contractors and use of new technologies are also considered
comprehensively. At present, EPC programs are mostly evaluated in the method of winning bid at the
lowest price worldwide, which provides the most economic tendering to the owner.

2 The difference between the EPC program and traditional projects

Compared with Chinese traditional model of project contract awards, the EPC model, namely the
engineering-procurement-construction model of award, has several features. They are as follows:

2.1 Advancing the participation date of contractors engaged in engineering project.

Chinese traditional project construction model progresses in three stages, which are,
design-bidding-building (DBB). In the traditional construction model, the contractor is the last one
engaged in projects, only in charge of the construction of projects. Under EPC format, owners usually
require that the contractor should be responsible for all the design, purchasing and building, integrating
the originally three stages into one stage. Thus, contractor has participated in the whole implementation
process of construction project.

2.2 Shortening projects duration

Designing, purchasing and building perform independently in Chinese traditional construction.
Regardless of the feasibility of construction and features of constructing entities, considering
insufficiently of changes in construction conditions, the inconsistency between designs and construction
results in large amounts of modification when constructing and the lowering efficiency of
construction[2]in Chinese traditional construction. The duration of project is extended owning to the
failing connecting between building and purchasing, the failing setting of equipments and the difficulties
of construction after setting the equipment. In the EPC contract format, contractors undertake the whole
work of designing, purchasing and building. Each stages is well organized and communicated efficiently
internally, which optimize the designing, purchasing and building plans. Meanwhile, contractors are able
to shorten durations and assure qualities by optimizing resource allocation[3].

2.3 The change of risk taking by using Lump Sum Contract

Quotation pricing is carried out in Chinese traditional construction model. Accommodating to the
development of market economy, the unit-price contract format in engineering quantity list quotation is
mostly adopted in current pricing of engineering contracts. Detailed constructing designs have been
provided when bidding, and contractors are able to calculating quantities on the basis of the design.
Therefore, it is possible to determine the scope of bidding quotation. Owners should take responsibilities
of the change in quantities. In the condition that EPS program progresses in Lump Sum Contract,
contractors have quoted according to the scope of projects, quantities of the work and qualities
requirements defined by terms of contracts and owners requirements. Contractors take risks of changes
in quantities and price risks[4], which increases risk of contractors and decreases that of the owner.

2.4 The change of the scope of owners right

In Chinese traditional engineering construction model, owners always play a role of projects manager,

making plenty of intervention to projects. In EPC contracts program managing entities or owner

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representatives take limited responsibilities to the construction of programs. Rights of owner
representative have diminished, and management charging and risks also have decreased respectively.
Likewise, the conflict among each part of projects has been abated as a result of the contractors
management for the whole process (Detailed actions including clearly defining the responsibility of each
party, clarifying rights and obligations of owners, etc.)[5]. Meanwhile, in EPC program, owners only
make requests of scope of projects, technical standards and requirements instead of directly engaging in
the project.
On account of conventions and characteristics of international EPC program evaluation, Chinese
contractors who are familiar with unit-price contracts valuation need to alter the tendering strategy
correspondingly when bidding for the program.

3 Optimization of bidding strategy based on value engineering theory

The biggest characteristic for EPC program is the owners control of all the designing, purchasing and
building stages, shortening the duration of projects and assuring qualities of project Thus the cost
control of projects not only means the cost reduction, and the value engineering needs to be applied for
optimizing the tender strategy when bidding.

3.1 Value Engineering

The Value Engineering was presented by American engineer Myers in 1950s, including three core
aspects: functions, costs and values. The purpose of the Value Engineering is to seek the rational
function costs, which is higher than the function value on basis. The function of Value Engineering is
F
V = , where V means the function value, F means functions and C means function costs. This
C
F F F F F
function has indicated that V = = = = = . Based on the correlations among
C C C C C

V, F and C, we have many choices on enhancing the value of functions. According to the PRC National
Standard GB8223-87: Value Engineering- General Terms and Work Program, the program has been
divided into four stages: preparation, analysis, innovation and implementation and twelve procedures,
including object selection, Value Engineering team building, work planning, information collection,
function system analyzing, function valuation, design innovation, strategy valuation and proposal
compiling, etc[6].

3.2 Optimization of EPC program bidding strategy based on VE theory

The EPC program tendering strategy needs to be set in combination with practices of EPC program
tendering and with the working procedure of Value Engineering.
3.2.1 Information Collection
Acquiring sufficient and valuable information is the premise of Value Engineering projects.
1) Owners information, including technical standards and specifications required in tendering document,
owners requirements for EPC program (requirements not referred in functional specifications) and
customary working ways of operators.
2) Project environment, including all related conditions of project construction, such as resources
exploration, transportation and labors.
3.2.2 Objects selection
Owners of EPC program take a heavy emphasis on functions of the program and chase the most
economic life cycle. Meanwhile, many EPC programs require to contract with money or to contract with
money paid in advance. Also, the commissioning terms are stated in the contract. It has been indicated
that, in the phase of decision making and strategy designing, the possibilities of affection on engineering
costs is 30%-70%, while only 5%-25%[7] of which in the phase of building. On the basis of information
collecting, taking accounts of lowest cycle costs and constructability, we select objects of Value

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Engineering by using the life-cycle cost approach and the decision tree method.

Construcion
Design

structure technique
selection

Project
project life cycle Completed

plant producing area

Procurement
Trial Operation
Figure1 The object analysis and select

Detailed procedures are shown in figure 1: In the way of life-cycle approach, EPC program progresses
in four stages, namely designing, purchasing, building and preoperation, and these stages are combined
together in logical relationship by the decision tree method. Contractors hire experienced engineers and
value analysts to analyze every stage on the decision tree and choose the factor which can effectively
smooth the construction process and maximize the profit.
3.2.3 Functional Analysis
Functional analysis, a key factor of Value Engineering, includes function definition, function
classification and function valuation.
1) Function definition and classification could be realized directly through FAST (Function Analysis
System Technique). As it is shown in figure 2, by using FAST, function definition, classification and
subdivision could be realized to operate basic and supplementary functions. In order to seek the
alternation, costs of each function are above the standards in the figure.

independent
HOW function WHY

x.xx
lowest lower lowest
cost function function

win optimized perfect lower lowest

bidding program function function function
bi

reasonable lower lowest

structure function function

scope of optimization
Figure 2 The FAST

2) Function Valuation

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It usually lasts three to four weeks from the issue of invitation for bids of Chinese EPC program till the
deadline of bidding. Compiling technical suggestion letters and business proposal in short times, taking
use of the 8-day or 5-day value researching models and adopting complicated function analysis and
evaluation, effectiveness could not be satisfied by optimization the tendering strategy. So the 3-day
value researching model to optimize the EPC program tendering strategy has been applied widely in
China, and contractors choose internal experienced and professional engineers and external experts who
are full of EPC program experiences to grade the program and calculate Function Coefficient by using
direct functional assessment approach. In chart 1, the highest score is 3 and the lowest is 1.

Evaluation
Persons Function value
Function A B C D score
coefficient

F1 1 2 2 1 1.5 0.18

F2 3 2 3 3 2.75 0.32

F3 2 1 2 2 2.25 0.26

F4 2 2 2 2 2 0.24

Total 8.5 1.0

Chart 1 The example of the function value coefficient calculating

3.2.4 Functional Value Analysis

In functional analysis, the real cost of each function during the bidding can be computed based on
technical suggestion letters and business proposal of contractors. EPC program focuses attention on
functions, thus the value index method has been applied to analyze each functional object in tendering
strategy. The detailed function is as follows: Vi = Fi . If Vi = Fi >1, this means that the
Ci Ci
function acquisition and costs inputs have made a match and that people should pay more attention to
the insufficient functions because of less inputs; if Vi = Fi <1, this indicates the mismatch between
Ci
function acquisition and costs inputs, and more attention should be paid to the modification because of
too much inputs[6].

4 Conclusion

Compared with traditional Chinese construction projects, EPC projects are different in many aspects,
such as construction management models, contracts management and the role of each party engaged in
the project. Currently, the majority of EPC projects have required that contractors should contract with
money or prepay the money and that the tendering time has been shortened. Chinese engineering
tendering valuation and international convention both apply the method of winning bid at the lowest
price to select contractors. Value management should take emphasis on the research of functions,
especially in the phase of project designing[8].Therefore, using Value Engineering theory, considering the
EPC project tendering proposal based on the whole life cycle, choosing Vi<1 as an alternation, not only
does it optimize the project designing, decrease quotations and give bases to contractors for choosing
customized techniques, bust also diminish financial pressures of contractors.

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