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Why Our Way To Develop Projects Fails To Minimize CAPEX

Oil and gas facility projects typically involve a front-end engineering design (FEED) contract followed by an engineering, procurement, and construction (EPC) contract. However, contracting FEED as a lump sum leads to suboptimal design and higher costs for clients. Under lump sum contracts, FEED contractors have no incentive to thoroughly define projects, consider alternatives, or optimize design to reduce capital expenditures. This results in missed savings opportunities and non-optimized designs. EPC bidders then rely on the low-quality FEED documents and make conservative assumptions, inflating costs with contingencies. To better control costs, the FEED should be contracted on a reimbursable basis rather than lump sum to incentivize optimization and

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42 views

Why Our Way To Develop Projects Fails To Minimize CAPEX

Oil and gas facility projects typically involve a front-end engineering design (FEED) contract followed by an engineering, procurement, and construction (EPC) contract. However, contracting FEED as a lump sum leads to suboptimal design and higher costs for clients. Under lump sum contracts, FEED contractors have no incentive to thoroughly define projects, consider alternatives, or optimize design to reduce capital expenditures. This results in missed savings opportunities and non-optimized designs. EPC bidders then rely on the low-quality FEED documents and make conservative assumptions, inflating costs with contingencies. To better control costs, the FEED should be contracted on a reimbursable basis rather than lump sum to incentivize optimization and

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Hervé
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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Why our way to develop

projects fails to minimize


CAPEX?
 

Oil & Gas facilities projects are developed in 2 steps: a Front End
Engineering Design (FEED) services contract followed by an
Engineering, Procurement and Construction (EPC) contract.

As companies need to control costs, they resort to Lump Sum (LS)


contracts for the FEED and the EPC.

I would like to share with you why this scheme does not fulfill the
requirements to lower Oil & Gas facilities CAPEX and which
alternate scheme, which I see becoming the future, does.

First of all, when contracting a FEED as a LS, one obtains the bare
contractual minimum in terms of studies done, alternatives reviewed,
if any, and deliverables. This not only results in lack of project
definition but also in missed opportunities to save CAPEX.

The lack of project definition is hard to spot and challenge. How can
one tell if enough thought has been put into a drawing? For instance,
how do we know if all constraints (1) have been duly considered
while establishing the Plant Layout and producing the Plot Plan
drawings?

The missed opportunities result from the fact that the FEED
contractor has no interest to spend hours to find alternatives to
optimize the design. The FEED contractor also has no interest to
propose alternates/deviations to Company specifications.

This last aspect is very unfortunate in the current context of low oil
prices and due to the fact that Companies have, over the last decades,
develop very extensive sets of specifications containing stringent
technical requirements. As cost was not an issue then, additions of
technical requirements to these specifications were not much
challenged. This resulted in numerous onerous and sometimes
unnecessary requirements which only a joint review between
contractor, that is aware of the cost, and Company, which is aware of
the operational requirements, could discard.

However such exercise, which includes identification of the onerous


requirements, development, justification and validation of
alternatives, take much time which cannot be spent by the FEED
contractor under a LS contractual scheme.

Under pressure to make a profit the FEED contractor spends as few


hours as it can.

This not only leads to a non-optimized design, which is already bad


enough, but also to the fact that this design will be over-priced. Here
is why.

As already stated above, under pressure to save manhours, the FEED


contractor will not go too deep on project definition. The design of
utilities is for instance usually overlooked.

In addition, the quality of document produced will be low. Rarely will


the FEED contractor, for instance, produce project specifications
giving clear, synthetic and project specific technical requirements.
Too often it will merely reference Company general specifications
resulting in a large amount of non-specific information to be sorted
out at a later stage.

The quality of a FEED is difficult to challenge by the Client, as it is to


describe in the FEED services contract.

The quality of the FEED documents will directly affect the quality of
the EPC bids. FEED deliverables are indeed the basis that will be
used by the EPC bidders for their quotations. EPC bidders do not have
time to review documents and revise them, as required, before to use
them as a basis for cost estimation. The cost estimate is therefore
based on the FEED documents. As we know: sh#t in, sh#t out.

As not enough effort has been spent at FEED stage to precisely define
technical requirements, or some studies not done or not documented,
the EPC bidder would need to make assumptions. As these
assumptions are made by technical personnel, who are not always
fully aware of the cost impact and who are chiefly responsible for the
technical soundness, assumptions are often made on the safe side.

In spite of the fact that the FEED quality level is unknown to the EPC
bidder, and that it has been contracted under a LS scheme fostering
low quality, the EPC bidders are required to endorse it, i.e., to take
full responsibility for any error or omission. The EPC bidders have no
time to thoroughly check the FEED during the bidding period. They
therefore include contingencies in their quotations, inflating the
Project cost for the Client.
Even though one readily sees that having the FEED done under a LS
contract and demanding such endorsement of the FEED by EPC
bidders are clearly conflicting, it is the norm today.

At this stage we see that contracting the FEED services contract as a


LS creates a conflict of interest between the FEED contractor and the
Client. It results in a non-optimized design. In addition, the Client will
pay more than it should for this non-optimized design.

It therefore seems quite obvious that a FEED should not be contracted


as a Lump Sum contract. Only a reimbursable basis allows design and
cost optimization, as well as improved project definition and quality.

This will be the first step in the improved project execution scheme. I
will explain how to improve the next step (EPC) in my next article.

This article was initially posted on LinkedIn and attracted


considerable attention and comments. Please refer to their valuable
contents at:

https://www.linkedin.com/pulse/why-our-way-develop-projects-fails-
minimize-capex-herve-baron

(1) Described in Chapter 5 Plant Layout of my publication “The Oil


& Gas Engineering
Guide”: http://www.editionstechnip.com/fr/catalogue-detail/1111/oil-
gas-engineering-guide-the.html
 

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