Increase ROI by awarding projects based on VALUE instead of just PRICE

 

 

Contributed by Brad Sawyer, Business Development Manager

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Increase ROI by awarding projects based on VALUE instead of just PRICE

Value vs Price H+M Industrial EPC

“Value” is defined as the monetary worth of goods or services, and “price” is simply a number on the tag. This is especially true in the petro-chemical industry where capital project services are custom and not likely to be repetitive.  This situation makes it challenging to determine the difference between value and price, and the breakeven point as to which is the best option.

Let’s take a look at engineering and design services:  By choosing the least expensive option when selecting an engineering/design contractor, a company will no doubt save money at the start of their project.  However, when the design package is completed and issued for bids to construction companies, the possible mistakes could prove far more costly than the high quality, more expensive engineering package.  This is obviously not to say that expensive = quality, only that it must be ensured that the necessary deliverables are provided accurately to have a successful project.

Usually, construction costs and process equipment are the most expensive parts of a project. This makes it important to invest in your project early to get it started out on the right track. If it’s not, change orders from construction will add to the job cost and the schedule will be compromised.  So if you look back at the 10 % “cost savings” achieved by going with the cheapest option, what did you really save?

A company must look at the total value over the lifetime of the project, not just the price. It is increasingly important to make sure the benefits outweigh the cost and provide the desired return on investment. The cost side of the equation includes things such as project bid cost, cost due to change orders, maintenance costs, and ongoing operating costs. ROI considerations include income from operations, income as a result of increased efficiencies, and additional income due to quick startup.

A simple example of value integration is EPC companies who have a dedicated civil/structural engineering department to work alongside construction. When dealing with a civil construction job that you did not engineer, you will no doubt end up scratching your head with questions like “why do we need this much concrete?” or “is this much steel really necessary?” In order to reduce engineering/design costs to become the low cost provider, many civil/structural engineering companies just throw in huge amounts of concrete or way too many supports just to reduce the engineering hours. So by reducing their engineering “cost”, you’re now paying for it on the construction side…and we all know how expensive concrete and steel can be.

A perfect example of this recently happened to us, H+M Industrial EPC, on a very large civil/structural construction only project.  After looking over the drawings, the H+M construction team noticed it was significantly over-engineered.  Our customer allowed us to re-engineer it, stamp it, and bid on the construction as it was then designed.  In the end, we were awarded the project, re-engineered it, stamped it, and constructed the whole project for way cheaper than the competitor with the original bid.  Now our customer has a better product for a better price, and recognizes the value in starting their project off right.

Determining value requires more than just following a formula. It changes for each job, company and industry. You must use your past experience to determine what is truly valuable to stakeholders. Do not always look for the low cost provider. Look for companies who are confident in their designs and create them with constructability in mind and the intent of bidding and being awarded the construction.  Doing so, you are increasing your chance of getting a good package that leaves little room for change orders. Look for someone who plans on being around when the project is completed, is eager to form a mutually beneficial relationship, and proud to put their name on your project.

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BradSawyer

Brad Sawyer – Business Development Manager at H+M Industrial EPC

B.S. in Industrial Distribution Engineering

Brad has more than 10 years of business development experience in the heavy industrial markets including Petrochem, Refining, Power, Mid-stream, and Terminals. His responsibilities include managing the Business Development and Marketing divisions at H+M. Industry experience includes capital projects, turn-arounds, outages, and maintenance along the Texas Gulf coast region.

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