Trends Driving Progressive Change within the EPC industry

    Mahesh Venkatraman No Comments Nov 25,2015 Ramco ERP Suite

    The Engineering, Procurement, and Construction (EPC) industry has been continuously evolving over the last few decades as a result of tremendous changes happening in the business and technology areas of this industry. Technology has taken rapid strides but disruptive technologies such as cloud and mobility have necessitated complete transformation of this industry vertical. Business models have also been changing immensely over the years. In addition, emergence of new players and expansion of established and global players have led to a boundary-less business world. All these changes have resulted in the evolution of the EPC industry from the pre-outsourcing era of 1985 to a completely outsourced, IT-enabled era of 2015. The EPC industry has seen a sea of transition in the following aspects:

    1. Outsourcing pattern: from zero outsourcing options in 1985 to LSTK projects being managed entirely by EPC companies through partnership/JVs in 2015
    2. Budget, schedule and cost management: from all aspects of EPC being completely managed by the client to the outsourced partner taking the entire project responsibility
    3. Extent of supervision: from the client supervising every minor and major portion of the project to the outsourced partners supervising and managing all the aspects of the project and just reporting to the client
    4. Risk management: From the client bearing the entire risk to all the players of the ecosystem sharing the risks in their respective area of expertise for the part of the process that is under their span of control
    5. Role of IT: moving from being a nonexistent entity with no backend support to being the backbone of the entire process and gaining importance because of the digitalization of the business process.

    All these factors have led to the emergence of the new-age EPC industry with immense growth prospects in both advanced and emerging economies. This is an era of booming infrastructures, with governments also looking at the EPC industry for high-spend, crucial projects such as creation of smart cities.

    Multiple trends and challenges in the market, business, and technology aspects are shaping the EPC industry in the current scenario.

    Market

    Trends

    The current focus of the EPC market is on energy production and distribution. For example, a lot of players are looking at Africa as a potential geography for energy distribution. With backend technology supporting high-end power plants with terra-byte capacity, this approach seems achievable. There is also growing interest in investing in renewable clean energy options such as wind, solar, and biofuel energy. There are now many companies in the clean energy space. The capital investment in this area is increasing because of increasing awareness about being environment friendly, decreasing carbon footprints, and decreasing emissions. In addition, many norms impose a lot of regulations. Although complying with these norms poses a threat to the market, it also opens up new venues of business, such as increased demand for environmental engineering and air pollution control systems.

    Challenges

    Delay is the prime cause of concern in this area. All projects have to be time bound to be profitable; however, the market still suffers from inherent delays owing to various reasons, especially for the larger, complex projects that are delayed because of land acquisition complications or environmental clearance issues. If possibilities of such delays are identified upfront then the required approvals can be sought well in advance, else the project gets into schedule and cost overrun. Regulatory restrictions also pose challenges. Many geographies restrict the entry of new players and force them to seek alliance with local partners to work in these regions. Time overrun and project inflationary cost escalations plague many large government-based projects. For example, the metro projects are currently running behind schedule, leading to both time and budget overruns.

    Business

    Trends

    Global players are now increasingly entering emerging economies to tap their growth potential, thus bringing in global project management experience. However this has disrupted the earlier business model and has equated the scope of business competition across the globe. The capacity and expertise required by the local players must be on par with global standards. This has toughened the competition. But it has also brought in ample opportunities in terms of the need for collaboration with global players to manage complex projects requiring competitive management skills and imbibing best practices from partners. More than ever before, the framework and policies being introduced now are business friendly and create a healthy environment that help global business to thrive locally – the “Make in India” policies are a typical example of this new approach. Some of the key global players in this area include Samsung and Bechtel. Another healthy business trend is the interchanging of roles that is now common in the EPC space. In a typical EPC project, the project management was the core component of EPC but was always outside EPC, but now, role diversification is the norm, where project management is entirely integrated with other EPC functionalities.

    Challenges

    The challenges on the business front are also considerable. The EPC lump sum contracting strategy often suffers from latent errors if all the aspects of the project are not captured upfront at the FEED stage. Hence unless there is a good control over the scope of engagement at the outset of the project, there is a huge possibility that new, uncovered areas would be determined only during implementation, leading to cost overrun. Owing to the dynamic nature of the business, the likelihood of change order requests cropping up at any stage of a project’s lifetime is quite high. However, regular review and monitoring mechanisms will ensure a tight control over such change requests. A relatively new challenge in business relates to dispute resolution. The new-age business environment requires multiple players to be involved simultaneously in one project at the implementation stage; the presence of multiple stakeholders hence increases the potential for conflict arising at any stage of the process chain. Hence businesses need to be prepared to manage and mitigate such disputes effectively. Finance has always been a challenge to managing business effectively. Hence the availability of long-term funding is key to success in this area. Another major challenge in this area is cost overruns resulting from aggressive bidding. Most of the government projects, for instance, are L1 bids. The pressure on the players in such cases is tremendous since they have to go low on cost while bidding, and while doing so, they will, in all possibility, fail to account for all the cost that will be incurred at the execution phase. Hence the lower the player bids, the higher the possibility of cost overrun during implementation.

    Technology

    Trends

    Technology has seen tremendous transformation over the last few decades. Many examples substantiate this incredible growth: the emergence of many fit-for-purpose solutions such as capital project contract management system, the introduction of strong integration engines with minimal limitations, the presence of common contract communications platform that allows businesses to operate across multiple applications, and futuristic disruptive technology enablers that prompt businesses to adapt to and align with the changing technologies. IT has hence moved from being an enabler to being the driver of business growth. The EPC space now takes a more strategic IT approach and, as a result, current projects in this area are complex, mobile and cloud dependent. The EPC industry is now willing to spend more on strengthening the IT infrastructure by improving the processing power, wireless data connectivity, mobility, cloud solutions, etc. The overall increase in the affordability of these technological advancements has also encouraged significantly increased IT spends in the EPC industry.

    Challenges

    The dynamic operating nature of the EPC business poses a huge challenge to technology in the EPC space – the potential for a change in scope during implementation stage is high; hence technological support must be flexible to accommodate this possibility. This also means that the constant ERP footprint must allow for the dynamic requirements of the business. EPC has moved from being scattered silo-based systems to cloud technologies. With further new technologies coming up in the near future, the need to understand and pre-define technology footprints becomes essential. Many organizations still run with independent finance and procurement systems. This would not be ideal in the current scenario; hence when new solutions are introduced these two systems must also be integrated into the primary workflow.

    Other challenges

    In addition to the above challenges, the resource crunch is going to be one of the biggest hurdles that needs to be overcome, with the industry falling short of at least 473000 PMs and engineers. Introduction of further institutes that churn out the required professionals and cross- and upskilling programs would help solve this problem.

    The current need of the EPC industry and solutions offered by Ramco

    1. The challenges and needs of the EPC industry are unique because of its process-centric nature whereas most of the current solutions are coarse fit and ERP centric that fit the product or manufacturing industry better. Hence the solution that the EPC industry needs is quite different from what is currently available.
      SOLUTION: A fully integrated ERP for EPC with real-time modules for project management, procurement, site inventory, HR, finance, and costing. Inbuilt dashboards and easy-access analytics provide clarity of the status of projects and offer simple solutions.
    2. Visibility of the contractor’s performance.
      SOLUTION: Contractor and subcontractor modules that help track the performance of contractors in terms of the activities, quality of work, deliveries, payments made, and overall progress.
    3. Integration of procurement requirements across all projects, to avoid duplication of procurement and hence avoiding cost overrun and a clear visibility of all the project costs, including hidden costs (e.g., that of travel or indirect labor costs).
      SOLUTION: Ramco’s EPC solution tracks all direct and indirect costs back to the project. The features include periodic project tracking, complete visibility of project profitability, and the ability to perform FSN analysis to control site inventory costs.
    4. A strong project management solution that simplifies project monitoring – determining current status of projects and precisely supported by accurate data. This allows the PM to focus on the activities that require immediate attention.
      SOLUTION: Ramco’s EOC solution simplifies tracking of schedule, cost, and quality of project. Alerts for schedule slippage and efforts overruns are inbuilt in the system. This also includes proactive alerts for mission critical tasks, and escalation management workflow triggers. This upfront visibility of project’s progress helps in establishing corrective measures well in advance.
    5. The accounting process of the EPC industry in unique – the RA bill generation is a complex task especially since the project spans several years. The accounting process hence has to be airtight, recording every detail of payment made and adjustment done during the lifetime of the project.
      SOLUTION: The EPC solution includes features that can track the various milestones within a project’s lifetime and effectively map milestone-based payments. The system allows tracking customer payment receipts and ensures that spends and payments are aligned to the milestones.

    Other features

    1. The system ensures a budget tracking of budget versus actual spend. It supports fixing project budgets and monitors budget against actuals project-wise and across the company
    2. Most of the EPC industry projects use the best of paid solutions such as Primavera and MS Projects. Hence any EPC solution must integrate with these solutions for smooth project management. Ramco’s EPC solution integrates seamlessly with MS Project, Primavera, and emails and SMS gateways.
    3. Every system must have alerts that are triggered for mission critical tasks in case of potential delays and overruns. Ramco’s EPC solution has this ability. The system can also enable robust workflows for escalation management

    Thus Ramco’s EPC solution mapping takes a project-centric approach and is driven from a project management perspective, tying up all the other EPC functionalities, including procurement and site inventory (and in some instances, manufacturing too), and integrating completely with backend functions such as finance and accounting and HCM. This comprehensive suite ensures that the five drivers of the EPC industry are mapped effectively:

    1. Effective alleviation of time and cost overruns
    2. Effective utilization of resources
    3. Effective fund management
    4. Effective project management solutions
    5. Effective use of technological solutions

    The system also includes cognitive features that simplify transactions through simple keyword recognition patterns, help access the system through mobiles, and use self-learning capabilities to recognize repeat patterns and recommend solutions over a period.

    Thus, Ramco’s EPC solution customizes ERP to fit the EPC functionalities, takes into account the current trends and challenges driving the industry, makes use of technology to provide futuristic solutions, and provides a system that can adapt to the evolving needs of the EPC industry.

    You can also view the recording of this webinar here.

    Ramco ERP Suite

    Mahesh Venkatraman

    Written by Mahesh Venkatraman

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