WHITE PAPER Ways to Improve the Bid and FEED Phases of Capital Projects by Ron Beck, Industry Marketing Director, Aspen Technology, Inc.
Executive Summary The capital projects market is intensely competitive for EPCs. Owners, especially in the exploration and production arena, are concerned with improving lifecycle project economics and are consequently putting pressure on the EPC community to sharpen their pencils. How does an EPC adapt itself to win in this competitive market? In the midst of uncertainty, there is strong opportunity for those EPC organizations who are positioned to be agile, flexible and creative. In particular, several breakthrough software technologies present a key opportunity to power the agile and flexible organization towards a competitive edge. One strategic software area is advanced estimating software. Model-based estimating leads to increased estimate accuracy, consistency and productivity. The productivity gains are attributable to the engineering knowhow, methods and automation contained in the software system, as well as with a more effective work flow that it enables. This contributes to success through increased ability to achieve speed, efficiency and quality on the bidding and proposal side and also to controlling and managing costs throughout project execution. Also, highly integrated software offers significant opportunities to redefine the timeframes and work processes during proposals, feasibility studies and conceptual design. More efficient work processes will enable optimizing designs during the proposal phase to save the client CAPEX and OPEX and give a proposal team an edge over competitive bids. But it will require lateral thinking for an EPC s leadership to make the organizational and work style changes that are an essential component to seizing this opportunity and becoming one of the leaders and success stories in this uncertain environment. FEED execution tools are a third key enabler. On the project execution side, there are significant opportunities for improvement in the engineering workflow and deliverables processes. Overbudget and behind schedule projects can frequently have their difficulties traced back to lack of definition of scope during Front End Loading (FEL), rushed Front End Design (FEED), and proceeding with detailed design without full access to FEED deliverables. (1) Integrated process engineering workflows have already achieved proven benefits to leading E&C organizations. Burns and McDonnell saved one owner 20% CAPEX on a gas-to-liquids (GTL) plant expansion, by reducing capital equipment counts by 75% (2). Model-based-estimating has also gained several organizations a competitive edge. S&B Engineers have achieved a 5:1 productivity gain on estimating during the FEL1 and 2 phases through adoption of model-based estimating (3). On the SADARA Petro Chemical Mega Project, prefeed estimates were able to be completed nine months faster than expected and the project, currently under construction, is tracking on budget relative to the FEED estimate. Rigorous feed delivery solutions have benefitted project execution, saving Technip Stone & Webster Process Technology 10% time on repeatable design projects. A profitability model developed by AspenTech suggests that the available benefits across the industry are in the tens of billions of dollars and the positive impact on project risk is even greater. Burns and McDonnell saved one owner 20% CAPEX on a gas-to-liquids (GTL) plant expansion, by reducing capital equipment counts by 75% 2
Alignment on Project Scope and Risk While a number of factors have driven many recent capital projects to run overbudget and behind schedule, let s focus on one of the current issues that is most frequently discussed, namely project scope definition. EPCs are broadly concerned about their ability to gain alignment, with respect to project scope, with their clients; and at the same time with the level of corporate risk imposed by the owners pressure to bid lower, perform more engineering during bidding, and towards lump sum contracting. Owners also recognize this issue. The September 2014 ECC (Engineering Construction Contractors) Forum, consequently, had as a theme, Aligning the Stars, (4) in which this topic was extensively discussed. In a midconference audience poll, involving an even split of executives representing owners and EPCs, lack of communication regarding project scope during bidding and FEED, was identified as a key issue. A Fall 2014 EY report (1) provided an analysis that conveyed contributing issues such as over-optimistic capital estimates, lack of agreement on project scope during Front End Loading (FEL), rushed Front End Design (FEED), and proceeding with detailed design without full access to FEED deliverables (see Figure 1). During the winter of 2014 15, individual global EPCs confirmed with AspenTech that these issues are all recognized as key concerns. Figure 1: EY analyzes reasons for overruns on 365 $1 Billion-plus projects Portfolio and Project Commercial Context Project Development Project Delivery Regulatory Challenges Geopolitical Challenges JV Conflict and Relationship Challenges Inadequate Planning Overly Aggressive Forecast Ineffective Project Management HSE Risk and Local Content Diplomatic and Security Issues Access to Funding Poor Procurement of Contractors JV Conflict and Relationship Challenges Regulatory Delay And Policy Uncertainty Financial and Supplier Market Uncertainty Poor Portfolio Management and Changing Risk Appetite Aggressive Estimates and Optimism Bias JV Conflict and Relationship Challenges Inadequate Infrastructure Civil and Work Force Disruption INTERNAL FACTORS EXTERNAL FACTORS 3
Project Scope What Do We Mean When We Say Align on Project Scope? It is generally agreed that the process flow diagram (PFD) and the associated supporting items, the utilities flow diagram (UFD) and materials selection diagram (MSD), are at the core of understanding, reviewing and agreeing on project scope. These documents both serve as a key handover point between the process engineering function and other engineering disciplines, and as a key communication point between the lead designers, the project managers, the estimators, and the clients. Complementing this key deliverable are equipment lists and line lists. The equipment list represents the key designed elements at enough detail to fully represent what the process engineer has in mind, allowing the estimator to turn the concept into a deliverable, costable plant. The equipment list is also a key communication point between the estimator and the engineering disciplines to reach agreement on the estimated scope and also should be the key communication point between the EPC and the owner. It is generally agreed that the process flow diagram (PFD) and associated supporting items, the utilities flow diagram (UFD) and materials selection diagram (MSD) are at the core of understanding, reviewing and agreeing on project scope. 4
The issues typically arise in the alignment on project scope when time, resource constraints (availability of key experts at the right time) and organizational barriers are put into the equation. Some of the key issues that the industry is grappling with are: 1Process Engineering, Modeling and PFDs: Process Engineers who develop the conceptual design, including the process model and the process schema, are typically averse to drafting. They need to be able to quickly and effectively produce, and most importantly change and modify, a PFD under the deadlines of bid and proposal work and early conceptual design, but without the right tools they are often delegating this PFD task to a drafter. This causes delays in PFD production, especially when changes are made, and the availability of a final PFD at times of discussion and negotiations with owners. 2Dynamic Owner Requirements: With the dynamic economic, business and even political conditions impacting project goals and definitions, owner requirements are frequently changing. This requires the process engineering team to make frequent changes and modifications, which has cascading impacts on deliverables such as PFDs, equipment lists, and estimates, squeezing timeframes and impacting rigor and quality. The frequent solution, which is to rush through FEED, is to keep the project schedules intact, which has a negative impact on project changes during detailed design and ultimately on project cost and schedule. In this environment, structured and collaborative FEED solutions such as Aspen Basic Engineering are a key tool. 3Shortages of Key Experts at Crucial Times: Across the process industry, short supply of experienced technical experts is a growing issue. During the bidding and project definition phases, experienced process designers and estimators are a critical component on both the EPC and owner side. Especially with the dynamic nature of projects, with frequent changes, experienced generalists who can quickly and effectively review the scope, resourcing risk, constructability, operability and ultimate risk of a project are keys to success. Software tools and methods, such as Aspen HYSYS and Aspen Plus, Increase the productivity and effectiveness of these experts and are crucial resources for reducing project risk. 4Transparency and Owner Review: Due to the size and complexity of many current process industry projects, it is essential that the owners fully understand the project definition, scope, constraints, cost estimate, and cost risks. This requires complete transparency between the owner and the EPC concerning the project scope and estimate, as well as software tools that will enable the owner s reviewer to understand at a detailed project and discipline level what is contained in the estimate. A crucial tool for owners to successfully manage their contractor relationships and projects is a transparent and flexible estimating system, such as the Aspen Capital Cost Estimator model-based system, which looks at the scope and total installed cost. 5
Getting a Handle on the Estimating Process Traditional With the estimate being a critical communication tool, let s explore the processes typically employed, the new technologies available, and the improvements that can be achieved. First, let s look at the traditional approach and its issues, followed by examples of new approaches and strategies and how to arrive at them. Traditional estimating processes, namely bottoms up, spreadsheet-based approaches and factorbased or parametric approaches present an organization with some serious deficiencies in light of the project challenges discussed above. These approaches are highly dependent on assembling a large team of estimators who are making calls, counting and entering information; are dependent on the responsiveness and understanding of vendors in supplying cost quotes, and are also dependent on the ability to reasonably extrapolate from historical cost files. Also, as projects become more dynamic, projects become larger in scale and complexity and contracting structures become more involved. It is increasingly difficult for one estimating manager or project manager to visualize, assess, analyze and understand the entirety of the data set, especially if it is a huge spreadsheet or series of spreadsheets. Inherently, these methods require a higher percentage of the engineering to be completed to achieve the requisite accuracy. 6
Model-Based The model-based estimating approach addresses all of these issues by building up a total installed cost estimate from engineer-in-a-box engineering first-principles models, which perform extremely well when scaling a design, but are not dependent. The model automates the process of applying the correct engineering standards, factors, sizing rules, and provisions. Aspen Capital Cost Estimator (ACCE) (originally introduced into the market as ICARUS ) is the leading commercially developed, model-based system on the market. It contains a comprehensive and broad library of equipment and component models, which include all related engineering rules, material and fabrication costs, and construction resources required to specify and estimate the total installed cost of that component. Simply by specifying an equipment type, size and materials of construction, and location, the model will simulate construction of the equipment, and will identify all associated bulks, instrumentation, civil, electrical, structural, indirects, and construction resources required (see Figure 2). Figure 2: From a column to a complete installed cost for the column using model approach Conceptual Equipment Design Shell Thickness Weight Nozzles Model Fabrication Equipment Costs Model Installation and Construction Project & Site Contracting Strategy Piping Instrumentation Foundations Structures Electrical Complete Scope Power Distribution Control Systems Site Development Indirects 7
Time and Consistency are Key Benefits of the Model-Based Approach The estimating team and the executive confidence in the estimator and their numbers are a crucial lynchpin in the bidding process. Experienced estimators are among the scarcest resources in the process industry today. When time is not a critical factor, an E&C can partially substitute manual estimation for experience, but this usually only masks the importance and value of estimating experience. At the bidding and early engineering phases of a project, time is a gating factor, and additionally the judgement and ability to consider contingencies of an experienced estimator are crucial. The model-based approach frees up the experienced estimator s time to analyze the overall project and anticipate issues and risk factors. A concept that Mike Monteith, founder of Strategic Estimating Systems (SES), has discussed extensively is that of, The right detail at the right time. It is a thought process, but interestingly the selection of the right software systems can be critical in engendering the success of this approach. The temptation of an estimating group, when put under pressure, is to enumerate quantities, filling in, very large supercharged spreadsheets. Many of the assumptions are hidden in formulas in the spreadsheet, and the overwhelming size of these pages of data keeps increasing. The difficulty with this enumeration approach is that the full project scope is not at all transparent, that it is a challenge to separate the important cost determinators from the less important detail, and that the flexibility to explore scope and process alternatives is lost. The much more sophisticated and transparent approach represented by ACCE is fortunately available. Instead of focusing on enumerating details (which are never correct or important very early in the proposal process), the user of ACCE focuses instead on getting the project scope correct and aligning the project scope with the process definition. This will then place the focus on getting major equipment items and metallurgy correct from a process intent point of view, and determining the bulk details through statistical and experienced-based engineering approaches, built into the software. This approach has been demonstrated to improve overall predictability and variance of estimates, greatly reducing required estimating manpower, and improving the transparency of the estimate in communicating between estimators and the executive team and proposal manager. 8
Proof Points Over a sustained period of time, the results demonstrating the value of the ACCE modelbased estimating, have been reported by several global organizations. PEMEX benchmarked 30 major refinery capital projects estimated using ACCE. Over those 30 projects, PEMEX s estimating organization achieved accuracy at a consistent level of approximately 21% for Class IV estimates and approximately 8 to 16 % for Class III estimates. ConocoPhillips, a downstream organization (now Phillips66), benchmarked their estimating results over a five-year period during which they switched from using a factor-based estimating approach to using ACCE. Phillips66 reduced their capital estimating variance (at the FEL 3 stage) from a 40% variance with factor-based estimating to a 12% variance with ACCE. They concurrently were able to improve the productivity of their estimators by a 10:1 ratio. The estimating group at S&B Engineers have used ACCE on a sustained basis for bidding and project work, and have measured a 5:1 estimating productivity gain during FEL 1 and 2 and a 2.5:1 productivity gain on FEL 3 estimates. Structured and Collaborative FEED Processes Projects have increased in size and complexity. Resource shortages and other factors have driven up project costs. Owners have responded by squeezing the FEED stage of projects, which has led to corresponding misunderstandings regarding project scope and further introduced mid-project fluidity. Global E&Cs have responded by getting bigger, both through acquisition and organically. But, as Chiyoda s executive chairman, Takashi Kubota remarked during a talk at Rice University in September 2014, We need the size, but does bigger mean better? We are not sure. E&Cs have further responded by bidding more aggressively in a highly competitive environment. Coupled with these factors, global work sharing and value-engineering centers have challenged project coordination and communication. During the FEL and FEED phases of projects, a strong front-end-design collaboration system can make a true and accurate process flow diagram (PFD) and key equipment lists available to the proposal (and project) team and the owner. This forms the basis for a transparent communication and discussion of project scope, to make sure that bids and estimates are prepared with the same realistic basis that the owner is requesting and expecting. This also creates the basis for the owner and E&C to confront the areas of uncertainty and risk in the proposed project, required resources, and realism in the execution plan; and make the appropriate decisions early enough in the project planning and development process. A system of this nature, such as Aspen Basic Engineering, can be a bid and project game changer. Collaborative FEED (Aspen Basic Engineering) further automates the FEED engineering change process, as well as the development of deliverables, especially when designs can be standardized or modularized. This adds engineering accuracy and quality efficiency. The challenge when adopting this approach and achieving the available benefit, is to change ingrained, traditional silo approaches to a collaborative team approach. 9
Breaking Down Business Process Barriers to Effectively Manage Change and Complexity The highly structured business processes that are standard within large E&C organizations have not undergone much change over the past several decades. As global work-sharing and the size and scope of projects has increased, managers have become paradoxically reticent to change, taking the conservative position that engineering and approval processes that have worked to achieve well-functioning plants do not require change. To meaningfully address both the bidding and project execution challenges and risks in an increasingly global business, these business processes need to be evaluated and evolve. The powerful capabilities of underlying systems together with wholesale changes in the engineering workforce presents the opportunity to conceive, develop, and execute projects in new ways. Specifically, during the bidding process, the opportunity to tie together process modeling systems, systems to rate major equipment items, front end deliverable collaboration solutions, estimating, and formal risk analysis can and will lead to a competitive advantage and overall better company and project performance for those organizations that embrace it. To meaningfully address both the bidding and project execution challenges and risks in an increasingly global business, these business processes need to be evaluated and changed. 10
Incorporating the Concepts of Standardized and Modular Design Another key trend that s driven by oil and gas exploration, production, and midstream organizations, is the standardization and reuse of designs. The one-of-a-kind engineering approaches, which have been a given in the process industry for decades, are increasingly being looked at as a problem in a marketplace where spiralling capital project costs can create significant friction in the global energy market. Energy firms are looking for E&Cs to lead the way in proposing standardized rather than the gold-plated design. Using the same integrated solutions, as described above, an engineering team can capture standard repeatable (or modular) design components as building blocks for projects that can be designed and engineered more efficiently, and at higher quality. Marcel Eijkenboom of Maturus Optimi (a previous key estimator in the DSM biochemistry company) has made a compelling case as to how he was able to effectively capture design building blocks that he was able to rapidly assemble into complete processes. Accompanying these with accurate preliminary costs and economics, he was able to credibly use this modular approach with business owners to evaluate the commercial viability of new chemical and bio products being considered for investment and commercialization. These methods are based fully on software available commercially today. E&C companies that adopt integrated, project-modeling techniques and build flexibility into their risk management or project changes will help oil and gas companies. In doing so, this can provide enormous value to their clients and support large scale projects more effectively. When an E&C firm helps reduce the cycle time of an oil and gas well development project by a significant amount (i.e. 20 30%), it can help their client deliver results far more quickly. Software consistency drives project transparency between owner-operator and E&C Use of the same software between the owner-operator and E&C, especially when employed with a transparent software system, allows for clear communication between owner-operator and E&C on the scope and resource requirements. The owner uses this to evaluate bids on a like for like basis and ensures that all requested scope is included. Owners, such as ConocoPhilips, have demonstrated improvement in project timetables, capital predictability, and EPC oversight through the transparent use of the same model-based software system by contractor and owner. 11
Next Step: Effective Decision-Making The E&C industry is rapidly changing, as is the nature of complexity within the business. For effective bidding, many companies have successfully implemented the aspenone software suite to help E&Cs deliver project proposals faster and with less man-hours to achieve superior process designs. Solutions from AspenTech significantly improve the ability to accurately estimate project costs early, bid faster, achieve better communication between E&Cs and owner-operators, apportion risk, and improve project workflows. Customer demands are on the increase, and being able to adapt strategy and equip engineering expertise with a cutting-edge economic evaluation and collaborative FEED software platforms throughout the engineering cycle will help to capitalize on project opportunities. By providing cost estimators and project managers with the right tools, project uncertainty and risk can be reduced and capability is enhanced for effective decision-making to control industry capital costs. In the quest for bid-to-win contracts, better and faster designs mean better value for customers, which underpin a successful strategy for E&Cs to survive and thrive in a rapidly developing market. AspenTech is currently working with several global E&C, EPC, EPCM, and owner organizations who have intiatives in place to gain competitive advantage from the approaches described in this paper. References (1) EY (October, 2014) (Ernst and Young), Spotlight on Oil and Gas Megaprojects (2) Robertson, Elliott (May 24, 2011), Burns and McDonnell, FEL-2 Optimization of Capital Cost of an NGL Revamp Facility, Public Webinar (3) Richison, Rick (May, 2008), S&B Engineers & Constructors, LTD, Using ACCE to Cut Estimate Preparation Costs (4) ECC Global Forum (2014), can be referenced online at www.ecc-conference.org 12
AspenTech is a leading supplier of software that optimizes process manufacturing for energy, chemicals, engineering and construction, and other industries that manufacture and produce products from a chemical process. With integrated aspenone solutions, process manufacturers can implement best practices for optimizing their engineering, manufacturing, and supply chain operations. As a result, AspenTech customers are better able to increase capacity, improve margins, reduce costs, and become more energy efficient. To see how the world s leading process manufacturers rely on AspenTech to achieve their operational excellence goals, visit www.aspentech.com. Worldwide Headquarters Aspen Technology, Inc. 20 Crosby Drive Bedford, MA 01730 United States phone: +1-781-221-6400 fax: +1-781-221-6410 info@aspentech.com Regional Headquarters Houston, TX United States phone: +1-281-584-1000 São Paulo Brazil phone: +55-11-3443-6261 Reading United Kingdom phone: +44-(0)-1189-226400 Singapore Republic of Singapore phone: +65-6395-3900 Manama Bahrain phone: +973-13606-400 For a complete list of offices, please visit www.aspentech.com/locations 13