Hydrocarbon Processing - June 2022 - 42

Plant Design, Engineering, Construction and Commissioning
dential construction. Additional details
can be found in literature1
For large projects like the cracking
and Bureau of
Labor Statistics. FIG. 1 shows that while
the material costs went up by 21% in the
12 mos prior to February 2022, bid prices
increased only 17% during the same period.
This illustrates the contractor's ability
to pass on some price increases to owners.
As a result, contractors have to look for
creative solutions to deal with this issue.
Based on prior experience, this issue will
not be transitory and is likely to persist for
several years until equilibrium returns to
the marketplace.
Project development. Project development
usually requires a detailed financial
analysis to obtain approval for investment.
This entails a discounted cash flow
analysis, which requires an estimation of
revenue, capital and operating costs and
risk. If a project has an internal rate of return
(IRR) that is higher than the cost of
capital-accounting for risk-the project
will be approved.
Every component of future revenue
and costs contains uncertainty; future revenue
depends on volumes and price; operating
costs depend on unit consumption
and unit costs of raw materials, utilities
and labor; and capital costs depend on the
cost of engineering, procurement of major
equipment and the cost of construction.
While operating costs can be accurately
estimated with modern process simulation
software, capital costs are much more
difficult to estimate precisely due to the
variability of labor and materials. As a
result, many owners and their engineers
carry a contingency in their capital cost estimation
to cover unexpected costs.
25%
20%
15%
10%
5%
0%
Sept.
2020
Nov.
2020
Jan.
2021
March
2021
May
2021
July
2021
Sept.
2021
Nov.
2021
Jan.
2022
FIG. 1. Change to construction inputs and bid prices, September 2020-February 2022.
Source: Associated General Contractors of America and Bureau of Labor Statistics.
42 JUNE 2022 | HydrocarbonProcessing.com
FIG. 2. Large cracking furnace in the
Middle East. Source: Al Bassami Industries.
furnace shown in FIG. 2, construction can
be ~30% of the total installed cost. If the
capital cost increases, the expected returns
from a project can jeopardize the economic
viability of a project. Over a period, if
enough projects are not approved, the
aggregate demand for construction materials
and labor will decline. This will help
moderate pricing, and eventually prices
will come down.
However, in the short term, creative solutions
are needed to deal with uncertainty.
It must be noted that all the projects
that were once put on hold or postponed
may emerge again in the future and will
end up creating a supply-demand issue.
It is prudent to continue seamless communication
with the owners (or potential
owners) during this postponement period
impacted by the pandemic. The same applies
with the current or potential suppliers
of materials used in construction. Lead
times for equipment and a large range of
construction materials have grown exponentially
due to the current situation.
Coping with uncertainty. While risk
and uncertainty cannot be eliminated,
ways to manage risk are discussed below.
All projects have a certain degree of
risks in executing-it is always prudent
to identify risks and make attempts to
mitigate the identified risks. A risk register
should be maintained in agreement
with the customer, and if needed, with
customer inputs incorporated. These
registers would address any uncertainties,
such as pricing, the management of
change (MoC) process and its impact on
the project, and safety aspects.2,3
Change in prices for inputs to new nonresidential construction
Year-over-year change in PPIs, Sept. 2020-Feb. 2022, not seasonally adjusted
Inputs PPI:
Bid price PPI:
12 months to:
Sept.
2020
1.8%
Feb.
2022
21%
1.8%
17%
Schedule flexibility. The ongoing COVID
pandemic over the last 2 yr has made
the world a more uncertain, volatile and a
complex place to continue business. Contractors
should explore opportunities to
continuously evolve to support business,
such as exploring flexibility in the project
schedule if it allows mitigating risks, especially
escalating costs. Allowing reasonable
time during the beginning phase of
a project (e.g., in the engineering phase)
facilitates more value creation or addition
in the front end. This may result in a reduction
in bill of materials or promote alternative
materials to reduce costs, gain process
efficiencies,
reduce eventual operating
costs, encourage creative automation, etc.
Possibilities to reduce overall costs can be
found, especially if timing is not a critical
factor due to current business conditions.
An overall review of the project schedule
makes complete sense to optimize cost
factors. If possible, tweaks in a project
schedule should be made to accommodate
design reviews to reduce project cost, accommodate
expected lead-time issues, and
synchronize/minimize staffing and workforce
deployment in different phases of a
project, especially in construction.
Open book with customer. Transparency
shown by the contractor leads to a
more confident and trusting owner, and
thereby results in a closer working relationship.
Disclosing a certain level of information-with
a non-disclosure agreement
in place, if required-helps gain an
owner's trust. At the same time, assisting
the owner to ensure the degree of change
management also helps. Depending on
the project phase and execution model
adopted, change orders can be expected in
real life. This is also the basis for contingencies
defined by the owners.
Long-term relationship with vendors.
A returning customer with an
invitation for bid tells a lot about past
performance. The relationship with a
customer should nurture itself with con
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