Chemical Engineering November 2021 - 36

to the project followup and working
with the contractor.
For pilot-plant projects, the costplus
approach almost always produces
a better product at lower cost.
Contractor labor rates and profit
When considering labor costs, recognize
that a " lower cost " or a " less
expensive " option does not mean
cheap. Contractor rates should be
carefully examined before commitment.
Many contractors, to secure a
bid, will underprice the proposal.
In a non-union firm, this
often
means that the contractor cannot
attract enough properly experienced
personnel to staff the project because
the rates they can pay are too low
to attract the best personnel. This
leads to problems later, because the
contractor is either always short of
personnel, resulting in schedule delays
and attendant increased overhead
costs, or low productivity due
to inadequately skilled personnel. In
a union shop, where the rates are
set, such staffing issues are usually
not a problem. Even with higher
hourly rates, a more-productive
and qualified team may end up as a
cheaper option if they complete tasks
significantly faster.
This includes not only the trades
personnel but also the supervisory
and engineering staff. Some smaller
pilot-plant contractors hire new graduates
or new tradespeople, pay them
at the lowest end of the pay scale,
and don't expect to retain them long.
This results in lower-cost proposals,
but no real experience, and almost
always costs the organization more
in the end. Other pilot-plant contractors
have their non-degreed design
staff construct most of a smaller
unit themselves, arguing that this is
more efficient. Usually, either the staff
tends to be lower end or lower productivity.
Arguments that their having
a degree leads to savings as you
need less documentation are very
dangerous, because these normally
translate to less ability to review the
product before it is finished. So, determining
how the construction will
be staffed is important.
Many organizations fixate on contractor
profit in cost-plus bids. They
feel if the profit is too high, they are
36
paying too much. Realistically, many
contractors, particularly smaller pilotplant
contractors, have a very limited
understanding of their overheads. As
a result, much of what they may call
" profit " is really lost in their overhead.
They realize they need to charge it
to stay in business but either cannot
really identify it or do not understand
the need to break it out as a separate
line item in their proposals. Typical
small contractor margins are in
the 15 to 30% range, of which half or
more can be assumed lost to cover
overhead. If the margins are much
below 15% " profit, " then the contractor
is often in financial duress.
Therefore, profit generally should not
be used as a selection criterion.
In-house requirements
The organization must take the time
to define and document all in-house
safety, equipment and installation
requirements, among others, and
should ask themselves a number
of focused questions, such as the
following examples:
* Is plastic tubing allowed in-house
for flammable and toxic materials?
* How close to the relief device
setting does the organization feel
comfortable operating?
* Do they want block valves or
bypasses on all components likely to
need maintenance?
* Are there organizational limits
on storage quantities, pressure or
temperature?
* Which codes does the organization
require following?
* Is there a standard piping desired
for instrumentation, sampling
or other common operations?
This documentation takes time
and effort before starting work, which
if not performed, leads to needless
design revisions and higher costs. A
detailed design basis including all this
information is prudent, but outside
the scope of this article.
Materials and equipment selection
Materials procurement is an issue in
all contracted units. Do you specify
all the materials or just the critical
pieces? A contractor's goals when
specifying and ordering materials
are usually making sure it does not
cost the contractor extra, it is as
easy as possible to order, and they
can get the materials quickly with
as little pre-planning as possible.
The organization, however, usually
wants to make sure that it receives
the right equipment for the envisioned
use first, and then worries
about the cost and ease of procurement
next. If the organization knows
what it wants, then it is easy to tell
the contractor to base their proposal
on that specific equipment. If the
organization does not know what it
wants, then it either must have the
contractor submit information in advance
for their approval or trust the
contractor's judgement. Either can
be a problem. Advance submittals
often slow down a project schedule
and take a great deal of effort
to review. Often, submittals may
be rejected before the organization
realizes they are not aligned with
the contractor on what the equipment
needs to do. Even more often,
submittals are routinely accepted
without any real review, leading to
inappropriate selections. Smaller
organizations with limited in-house
resources may struggle to find the
expertise to review submittals.
Most contractors have very limited
operational experience (if any). As a
result, their ability to understand the
effect of lower-cost components on
maintenance and operations is often
suspect. On the other hand, many
components have a long enough
life that, in a research world, even
their limited life is much longer than
required. A plant might be able to
argue that paying 50% more for a
valve with a 10-year life is economically
viable. A pilot plant with a projected
three-year life will not see the
return on its investment (Figure 5).
Conversely, a pilot plant with numerous
lower-cost components that fail
too quickly will have a terrible downtime
record and almost certainly require
a much longer and ultimately
more expensive schedule to complete
the required research program.
And every pilot plant requires a large
amount of smaller equipment, such
as struts, minor instrumentation,
gages, valves, fittings,
regulators
and so on, that, while individually
less critical can, in summation, sigCHEMICAL
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Table of Contents for the Digital Edition of Chemical Engineering November 2021
