Future Project Delivery Models

I'm proposing a different type of delivery model... but something that is not a huge departure from the previously tried (and perhaps failed) approaches.

The industry has been through the EPCM approach which aligned to fast-tracking, flexibility and achieving quality. That seemed to result in over-blown budgets as the focus was primarily on schedule and quality and resulted in lots of changes through the project. The industry has to a certain extent also been through the EPC approach which is aligned to a fixed schedule, fixed cost and fixed quality level (usually the lowest technically suitable level). That seemed to result in overblown budgets and schedules, mainly because the owners were either never ready with the level of definition to support a lump-sum project at the start or changes occurred along the project life-cycle which resulted in change orders due to the inflexible nature of the contracting approach.

The key in all of the above is FLEXIBILITY... which is required to accommodate technical risk. It is almost inevitable that a project will need to change the scope as the detailed engineering progresses. This can be due to the oversights / incorrect assumptions from the feasibility stage being uncovered (this is normal) or external factors, such as permitting, driving the need to change the design. The message in this is that flexibility is almost always needed during the detailed engineering phase (typically in the region of ~10% of the project costs). However, once the design is complete, far less flexibility is required during the construction phase apart from some typical issues with varying ground conditions (which can be overcome with some more diligent geotech studies beforehand). The risk during construction is really around the pricing and the ability to manage contractors to deliver. So the model should be fairly simple, time and materials (T&M) for detailed engineering and lump-sum for construction...right?

Yes, but not quite. There is still the procurement phase in-between where the cost of equipment usually sits in the region of ~20% of the total project costs. This starts to make life a little complicated... The difficulty is that the placement of equipment orders needs to be substantially completed in order to obtain vendor drawings which allows the detailed engineering to be completed. Some would argue that you could procure the drawings from the vendors but the trouble with that is that the validity period for the vendor's quotes would elapse before you finished up engineering and were in a position to lump-sum the procurement and construction (see the second example in the diagram below).

The need for flexibility while procuring equipment is fairly low as the process design typically doesn't change fundamentally during the course of the project. Having said that, the fluctuation of equipment prices from the estimate is relatively low too. Therefore, there is no real difference to a project if equipment is bought on a T&M or lump sum basis. So, without a compelling need to lump-sum the equipment, we can simply do that on a T&M basis along with T&M engineering to get to the point that the remainder of the project (~70% of the cost associated with construction) can be bid on a lump-sum basis.

I did a very quick and conceptual schedule to determine the timing impacts and there is a slight increase to the schedule as a result. However, given that projects are not schedule driven (at all costs), this is a small price to pay for certainty on the construction which is where most of the risk lies.

Therefore, I would recommend that we, as an industry, start to look at an alternate model of T&M engineering and equipment procurement and then moving into lump-sum construction.

Your thoughts on this topic would be most welcome...