Do You Know What's In Your EPC Supply Chain?
By Thomas Adams, ABS Group Vice President, Power Business Development
With the maturity and experience of many engineering, procurement and construction (EPC) firms supporting the US power market, many owners are content to manage their financial risk of poor quality through their EPC firms and the prime contract. However, those that take this approach are potentially exposing their project to new risks in the overall project supply chain which, if not managed proactively, can surprise the project team late in project execution, causing large costs and delays. Modest investments in a well-planned independent quality assurance and vendor surveillance plan can mitigate this risk and play an important part in assuring project success and return on investment.
Understanding Global Supply Chain Risks
It remains a buyer's market for EPC services on gas-fired and renewable energy projects in the US. Developers and owners are benefitting from high levels of competition among established contractors, getting great project prices, terms and schedules. However, this high level of competition is being driven throughout the OEM and contractor supply chain, and is taking procurement to new international markets—and, in some cases, unproven manufacturers and sub-suppliers—while chasing the best price and delivery for major project components. With the global supply chain in a near constant state of flux, owners must be diligent in overseeing quality and compliance on every project in order to understand and mitigate their risk.
EPC and original equipment manufacturer (OEM) contracting in the US power industry is a mature market, and standard terms govern warranties, schedule guarantees and quality mandates. However, if you rely solely on your EPC contractor and major equipment suppliers to surveil the supply chain, you may be taking on unnecessary and potentially costly risk. It is difficult, if not impossible, to achieve full alignment of interests and protection with your contractors when they are bidding with aggressive margins and contingencies to win a project.
EPC warranties, liquidated damage clauses and quality requirements provide some measure of financial and contractual protection, but can also provide a false sense of comfort assuming that everything is the contractor's problem to manage. And alternative EPC contracting structures, such as when owners directly procure major equipment for the project, can add additional risk for the owner.
ABS Group has been involved in projects where these types of risks have resulted in significant costs and delays for the owner. One example is a combined cycle gas turbine project for which the owner had retained responsibility for major equipment procurement. Through a competitive bidding process, the owner had received aggressive pricing and delivery from name brand OEMs. Unbeknownst to the owner's team, however, one of the manufacturers had subcontracted the bulk of their fabrication of a key project component to a new supplier in Asia.
This supplier did not adhere to the agreed quality plan, and the issues came to light too late in the project to avoid large costs and delays. While the OEM in question did pay liquidated damages to the owner for the delay, the owner incurred additional costs by needing to institute an independent surveillance program immediately, mobilizing from the US, and other costs on the project which were not covered by the OEM's damage payments. This situation could have been avoided by implementing an independent quality assurance plan at the outset.
Reducing Project Delivery Issues
Owners can never completely transfer this risk to the contractor and OEM, and if a large supply chain problem occurs late in a project, additional costs will be incurred by the owner. It is advisable and much more cost-effective for owners to proactively mitigate these risks before they occur.
By making a modest investment and working with an experienced, independent, global third party inspection and verification advisor like ABS Group, owners can take control of these risks and add significant value to their projects. Using qualified local technical experts in the regions where manufacturing is performed, a robust quality management and surveillance plan can be implemented in a cost-effective manner. Comprehensive coverage can therefore be achieved with minimal travel and time expended by deploying the appropriate international resources.
This approach gives owners the advantage of an early warning of quality or compliance issues, providing sufficient time to resolve them before they impact the project. An experienced independent inspection team can define a risk-based inspection approach, based on factors such as sub-supplier experience, supplier corporate quality certifications, review of quality plans and documentation and manufacturing plant validation audits.
Working with the owner, the inspection team can define a targeted plan, deploying the right resources at the right time and place to validate quality at the most important manufacturing steps and with the most at-risk suppliers. This balances investment, time and efficiency throughout the program and results in a substantial reduction in overall project delivery risk.
A well-designed surveillance program also can adapt to changing conditions over the life of the project, focusing on problem areas that may arise and reducing coverage where sub-supplier performance is meeting all quality objectives with documented compliance.
Project Quality Benefits Your Bottom Line
The potential payoff from an independent quality program is huge. Catching just one significant quality issue or manufacturing error at the source can potentially save millions of dollars in costs and delays. Prudent owners should consider an independent quality program as another important feature of their overall risk management plan for their project.