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Managing Procurement Risk: Cost Effective Approach

Risk is usually something that may happen which will have a negative or positive impact on a project.

It is important to understand that risk is inherent in all projects and cannot be fully avoided, but might and should be mitigated and addressed in advance and in detail. Formalised risk management can have a major positive impact on project outcomes.

There are a very large number of potential risks on a project. To identify them, a “screening” process is required to determine which risks require special attention. In addition to generic risks, other special risks such as availability of resources, competition and other “what if” scenarios should be considered. All stakeholders should participate in identifying, assessing, mitigating and managing project risks and opportunities. Risk analysis helps to ensure that the decision to proceed (or not) at each phase considers not just “expected” outcomes, but all those with significant probability.

One type of risk that is often not properly taken care of in many projects (and we have seen serious negative consequences of this) are risks associated with procurement, i.e. manufacturing, storage and logistics of process equipment for the project.

Equipment costs can represent up to 40-50% of total budget for a deep conversion project and the duration of manufacturing of some critical items of equipment can be about 18–24 months. Any delay in manufacturing or changes that lead to an increase in price may cause a serious impact on overall project economics and results – this is typical in many projects across the world, especially large and complex projects that include different units, large scope of utilities and are ordered from several vendors.

Risk is inherent in all projects and cannot be fully avoided, but might and should be mitigated and addressed in advance and in detail.

Risks associated with procurement and manufacturing of critical equipment are real and need to be addressed in early stages of the project.

Detailed specifications should include:

  • Requirements for materials, design, components
  • List of suppliers agreed by the Licensor
  • Requirements for quality and content of vendors’ documentation

Licensor’s requirements for quality of equipment manufacturing:

  • Requirements to PMI procedures (Positive Material Identification), welding, painting, etc.
  • List of critical control points of equipment manufacturing, checked by the Contractor and also Independent Third party and Licensor during manufacturing of equipment
  • Installed equipment acceptance by Licensor

For manufacturing of non-critical equipment datasheets for all process equipment are as follows:

  • Recommendations for materials, design
  • Requirements for vendor’s documentation
  • Need for licensor’s clear requirements for equipment manufacturing quality (for the client’s approval)

Let us look at the main risks during manufacturing of equipment, there may be one or two or a combination of them at once:

  • Non-compliance of materials
  • Non-acceptable deviation in sizes
  • Non-compliance of operating parameters
  • Deviation from manufacturing schedule
  • Incompleteness during shipment
  • Careless preparation for transportation
  • Impossibility to provide operating capability

If not correctly controlled, elimination of some of the abovementioned deviations may take a lot of time and cause months of delay in project implementation.

Inspections – The Broad Role

inspections The critical appraisal, examination, measurement, testing, and gauging of project equipment/materials should be executed by qualified expert personnel according to recognised/required standards. An inspection determines if the material or item is in proper quantity and quality/condition and whether or not it conforms to the applicable or specified requirements. The role of the inspection is to verify and validate the variance from what is required.

From the Client side, Inspectors should be Independent and Confidential - inspections are to be conducted by agencies that are not involved in any project activities other than inspection/testing, especially in the design, procurement, construction, or installation activities, they only perform inspections and testing and report only to the client. The process of inspections - done by a Third Party Organisation and overseen by the Owner’s Project Team; a Third Party Inspection (TPI) company is an expert organisation in the applicable organisation that complies with the relevant international (ISO 17020 Category A) and/or national standard. TPI should meet registration requirements and accreditation requirements with recognised entities, governments, trade associations, and professional societies. It verifies that systems, equipment, supplies have been manufactured and prepared for shipment in accordance with the Owner’s specifications. In other words, TPIs ensure that the client gets what he is paying for.

The role of the inspection is to verify and validate the variance from what is required.

Expediting – The Right Way of Doing Things

Expediting refers to the set of activities in good project management that ensures the timely delivery of equipment and material of the required quality. Often, companies do not start expediting until there is delay; but a better scenario is to start early and perform expediting in close coordination with inspections. Again, the Client should appoint an independent organisation to carry out this expediting function.

expeditor The expeditor performs the following general functions: controls the progress of manufacturing by the supplier concerning quality, packing, conformity with standards and set timelines; makes sure that the required goods arrive on time and to the specified quality at the required location.

In general, inspection and expediting functions will help save project time and cost. It is worth investing only in experienced inspection and expediting companies, since the company offering the lowest cost may not be the best for every task.

Inspection and expediting functions will help save project time and cost

Road Plan:

  1. Companies need to hire experts who know the requirements in the country where the equipment/material is being manufactured or procured, know how to get the equipment/material to meet national requirements and to get it into the country
  2. Should plan to send competent engineers from the Owner’s Team to participate in or witness an inspection or test at the vendor’s shop or to expedite critical items
  3. Inspection and expediting activities are absolutely necessary for inspection of licensed units, package units, control systems, and safety instrumented systems, also crucial to expedite items that are on the critical or near critical path of the project

Customers’ careful attention to the equipment manufacturing issues and delivery is a key factor of success in the implementation of downstream (or essentially any type of) projects.

Involvement of a proven, independent company for inspections is a cost effective way to manage risks related to the quality of equipment manufacturing. We have provided such services to many Clients in different regions and our experience shows that even well-known companies have had problems during manufacturing which led to significant delays for the overall project. Hence, we always strongly recommend to Clients to start the independent Third Party Inspection programmes prior to placing orders of equipment.

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Published by:

January 2018