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Combined with skilled labor shortages, shop space availability, access to raw materials and interest rates, tariffs are just the latest addition to the challenges faced by leadership working to deliver certainty of schedule, budget and quality on capital projects. Add to that the extended front-end planning timeline — often 18 months to reach FID — and four-year average EPC durations, and one thing becomes clear: “Lock in pricing early” is no longer a reliable risk mitigation strategy.
Owners and contractors can reduce exposure by adopting modern procurement and fabrication strategies that directly address today’s volatile market conditions.
Enhanced front-end planning process
With long-lead equipment like breakers pushing past 1,100 days, early engineering and procurement decisions are more important than ever. Delays at this stage trigger costly ripple effects downstream.
David Clem, CEO of Farmers Industrial in Texas City, Texas, emphasized how his early involvement contributed to mitigating the risks posed by external threats to project success.
“We are engaging much earlier with our clients to provide design assist and lead time guidance for materials, especially for fabrication requiring stainless steel, copper, nickel and special alloys,” he said.
FARMERS also supports client decisions related to pre-assembly and modular fabrication. In response to current market dynamics, Clem noted that many clients are reducing key project risks by procuring materials early and shifting construction hours into controlled shop fabrication environments.
Integrated strategic sourcing plan
Integrated teams work faster, smarter and more efficiently to deliver projects with a higher level of quality and safety. Leveraging trust, the team is more open to innovative approaches and new ideas designed to solve the project challenges. This integration goes beyond the core project development team and includes engineers, fabricators and constructors.
ExxonMobil Refining & Supply has been a client of FARMERS for over 70 years. A shop coordinator with ExxonMobil Refining & Supply shared his perspective on the long-standing collaboration.
“I have worked with Farmers for over 10 years and visited their shop in La Marque (Texas) several times to perform shop visits and verification of multiple jobs. They are one of my highest rated shops.”
That kind of trust becomes even more valuable in a turbulent materials market. According to Clem:
“We are working closely with our raw material supply chain to procure the most constrained materials now. For example, some of the exotic alloys have a lead time of 13 months versus the nine months we saw last year. The prices have escalated by over 15-25% in that same period. Raw material quotes are good for the same day and there is no opportunity to hold pricing for more than that.”
Only further complicating the materials pricing models is the common exception that backordered materials are subject to the spot price at the time of shipping.
Additionally, he pointed out that a decision delay that misses the start of a mill-run may potentially cause an indeterminant materials receipt delay.
“These aren’t day for day impacts. Even a one-week delay in decision-making can have a tremendous impact on schedule and price.”
Especially as it relates to materials beyond standard stock, if available materials are found in limited quantities at a supplier, the best risk mitigation strategy is to take decisive action and make the purchase.
Clem offered some strategies he is implementing for his customers designed to hedge project risks of fabrication across FARMERS’ O&G, chemical, manufacturing and power projects:
- Early material procurement, with shop storage
- Early fabrication release, with shop storage
- Partial order releases on minimum quantities at 30% and 60% of design
- Shop space reservations
- Selected scope fabricated and pre-assembled onsite in a controlled environment
- Design-assist maximizing pre-assembly and modularization upstream of the construction site.
- 3D Total Station measurements to ensure fabricated components/modules meet tolerances and field dimensions prior to shipment avoiding rework or return to shop.
“Our modules and pre-assembly clients love this,” Clem added.
Getting it right the first time is critical to achieving operations and project objectives. ExxonMobil’s Shop coordinator focused on quality and qualifications in choosing partners.
“FARMERS adheres to Exxon’s strict quality standards for material verification and engineering. They have detailed records for data packages, employee qualification and equipment traceability,” he said.
Collaborative contracting models
In the most constrained markets, the best contracting strategy is a collaborative form of agreement, executed amongst all project participants, promising an integrated delivery of the project and shared risk model.
Under these agreements, risk is assigned to the party best positioned to mitigate or control it and contingency is shared by the parties to the agreement. Pooled contingency prevents the layering of risk found in traditional contract models, increases the speed of project delivery, maintains team focus on objectives and contributes to the trust between the parties.
Resilient and adaptable people and plans
Boxing legend Mike Tyson famously said, “Everybody has a plan until they get punched in the mouth.”
Resilience in the face of adversity is a quality necessary to survive the turbulent environment of capital projects on a good day — whenever that is. In building teams for project delivery, intentional focus on putting the right personalities in critical roles is key. Decision makers must be capable of consuming and analyzing data in real time, making smart decisions under pressure, adapting plans to pivot in fluctuating markets and leading teams through shifts in objectives.
That’s where relationships like the one between ExxonMobil and FARMERS really show their value.
“FARMERS’ attention to details is one of the best qualities that has got me out of several jams,” the shop coordinator said. “Exxon has given them some jobs that had crazy timelines, and they met or exceeded schedule.”
For more information, visit farmersindustrial.com.
