Many end-users today are concerned their projects are costing too much. Major cost overruns have become commonplace throughout industry, and these are coming on the heels of cost-cutting programs by clients. Owner companies have mandated many changes, including the use of high-value engineering centers; they've cherry-picked the markup breakdown to the point where few design firms are profitable, and now they are demanding excellence from the same firms. Since these firms are the ones in the best position to find total installed cost (TIC) savings, is it any wonder that the main result of reduced markups are TIC budget overruns?
Owner companies should recognize they are not going to get "excellence" or achieve "disruptive change" by cutting engineering markups to the bone. Yet a path to disruptive change already exists. The Construction Industry Institute (CII) has developed a chart clearly illustrating the greatest chance to reduce TIC cost occurs at the very beginning of a project and diminishes quickly as the project progresses. This tells us that we should spend the most time looking for cost savings early in the project's life and continue but at a decreasing rate until start-up. While some will continue to focus on saving 2 percent on markups, the winners will be those who focus instead on early-stage TIC cost reduction.
During our early history, we were acquired by a major construction company. In our first year together, we bid several lump-sum turnkey projects and lost every bid. So the next year we set out to find new ways to be competitive. We found several, but our use of early-stage brainstorming focused strictly on lowering TIC turned out to be a real winner. For example, one of our designers looked at a set of owner-furnished preliminary piping layouts for a new plant and said, "I can save over a million dollars just by improving the layout." In four days, he completed a new layout, which was presented as an alternate bid with nearly a million dollars in cost savings. By reducing pipe lengths and the number of fittings, our alternate bid was also more energy efficient. We had our first major EPC bid win.
As further proof of this concept, our bid-win ratio went from 0-57 percent after we applied these lessons. We even found significant savings on projects that appeared relatively simple. For example, we bid a project to construct over a mile of high-pressure 24-inch steam line. The layout proposed by the owner had expansion loops made from long-radius ells, and the line had to be stress relieved as the standard thickness was 0.75 inches or more. In a brainstorming review, one of our pipe stress experts suggested that by changing the long-radius ells to induction- bended loops of sufficient radius, the stress intensification factor would drop by a factor of over two-thirds, reducing the number of expansion loops by almost the same amount. By using centrifugally cast pipe, we were able to design a pipe thickness of less than the standard 0.75 inches and still meet code. This eliminated the need for stress relieving. The combination of all our ideas resulted in savings of over 30 percent of TIC. That is "disruptive" in anyone's book.
The above techniques used to be standard operating practice for many firms. Contrast that with this recent feedback from a major midstream client: He had been awarding his work to the lowest bidder based on engineering costs, but his savings were wiped out by errors and omissions. When he questioned one firm about this, they said they could "not afford to check drawings on fixed-price engineering bids." He then told me that we always had the best quality but we ran about 20-percent more on engineering cost. I told him that checking drawings, which includes doing pickups, back checking and repeating that cycle until the drawings are correct, adds about 20 percent to the engineering cost but saves much more on expensive field changes. We are once again doing his work.
Owner companies looking for major cost savings, as opposed to a couple of percentage points on markup, should partner with engineering firms that make this concept a part of every project.
For more information, visit www.burr owglobal.com or call (713) 963-0930