The capital project industry has witnessed improved work processes and systems in recent decades. However, the underlying business process seems to remain the same, resulting in the possibility of decreased profitability, poor risk management, and uncertainty in the project supply chain. It is estimated that about 70% of all capital projects fail to be completed within 10% of the budgeted costs or schedules.
While there has been ongoing research to redefine the overall business model in the industry, improving the formal stage gate approach in the capital project development process can help save significant costs and keep project life cycles intact. Let’s take a look at the different stages of the capital project development process and how they can be improved through an EPC contract.
The Value of Front-End Planning
The conventional approach is to divide capital project development into four phases—front-end planning (FEP), detail engineering and design, procurement, and fabrication and construction. Project owners often hire contractors during the FEP stage solely to estimate the total cost of executing the project. However, front-end planning should be considered the most critical to the determination of a project’s success. This phase should include opportunity identification, project scope development, and execution planning, along with cost estimation.
Defining the scope is critical to the success of a capital project. A detailed FEP stage gate approach not only helps stakeholders maintain and improve ROI but estimates the flexibility in the project scope to meet priorities. The following three FEP stage gates highlight the opportunities for cost savings and significantly improve the capital project development process.
The first FEP stage gate assesses the potential cost of the project, with estimates typically a Rough Order of Magnitude at +/- 50%. At this stage, the initial project scope and project plan are introduced while identifying opportunities for ROI. In case the project has a poor ROI, a project owner can consider canceling the project altogether.
Once the FEP 1 stage is approved, the project scope is further defined while conceptual designs are developed. The contractor provides price quotes on materials and equipment to be used in the engineering and construction phases to allow the project owner more clarity on the cost structure. At this stage, a +/- 30% of the initial cost estimate can be approved to move the project to FEP 3.
At this point, the project scope is fully defined with detailed preliminary designs as well as accurate cost estimates. The Front-End Engineering and Design (FEED) stage aims at a final budget estimate that is +/- 10-15% of the initial estimate.
The significant narrowing of the cost estimate range from +/- 50% in FEP 1 to +/- 10-15% in FEP 3 reflects a much more accurate cost estimate due to the increased amount of information that has been gathered. It is beneficial for construction to be involved at these early stages to ensure accurate estimates.
Capital project owners often bid out projects after they have already decided on a design. At this point, the general contractor, material suppliers, or vendors cannot influence the cost or the schedule and simply follow the design specifications, which could result in a prolonged timeline.
The design-build method, also known as EPC (engineering, procurement, and construction), is an effective approach where a single contractor works with the project owner and provides front-end planning, design, and construction services. By getting involved in the project as early as possible, the EPC contractor can work with the project owner to fully define the project scope and provide more accurate cost estimates for all project stages. With a single entity involved from design to delivery of the project, there are reduced risks of errors in the construction phase and delays in the project timeline.
Improving the Capital Project Development Process
The capital project development process is critical for the success of a capital project. Front-end planning is perhaps one of the most essential pieces of the development process, as it provides the opportunity for proper scope definition, cost estimation, and project execution. This is why it’s important to hire a contractor with a highly-developed front-end planning process.
At H+M Industrial EPC, we have been successfully providing capital project services to the chemicals, energy, and terminal and logistics industries for more than 30 years. Our proven EPC approach helps you internally execute projects from front-end planning to construction with certainty. Collaborating with our in-house construction capabilities can not only reduce your project’s cost but also keep the timeline intact.