Introduction to EPC project logistics – part one

The intention of this series is to contribute to increased mutual understanding among EPC logistics departments and logistics service providers. We encourage you to share your feedback with us, so we can incorporate observations into coming articles.

Introduction

“Logistics is defined as those activities that relate to receiving the right product or service in the right quantity, in the right quality, in the right place, at the right time, delivering to the right customer, and doing this at the right cost,” as stated by Shapiro, D. Roy., Heskett, L. James., 1985 in Logistics Strategy: Cases and Concepts.

This explanation appeals to Fluor and encompasses the soul and purpose of meaningful logistics, a specialty that requires strategy, planning, prioritisation, and the movement of resources.

When considering logistics management for the engineering, procurement and construction (EPC) industry – for which typical projects include those related to oil and gas, mining, renewable energy, petrochemicals and infrastructure – I want to stress that the specialty includes much more than ‘just’ physical movement of material and equipment from one location to another. I will attempt to describe its complexity and mutual interfaces in detail a little later, but first it is important to understand a typical EPC project life cycle.

Life cycle of an EPC project

In general, EPC projects can be divided into two main parts: front-end loading, and back-end loading.

The Front-end loading of a [facilities design and construction] project can be described as the process by which a company (and project team) translates its marketing and technological opportunities into capital projects. In other words, during the front-end loading phase, the questions of ‘why, what, when, how, where and who’ are answered.

The objective of the front-end loading phase is to achieve a detailed definition of a project’s scope and what is required needed to satisfy the business objectives for the capital investment.

By providing a detailed project definition that can be communicated and agreed upon by all project participants prior to authorization (prior to authorisation of the project start phase), the number of changes that could be required in later project stages are minimised. The project outcomes are therefore, theoretically, more predictable.

The FEL phase is defined as the period from when a business opportunity is identified and to the point at which a project capitalizing on the business opportunity is authorized.

Even though the detailed definition of front-end loading may differ among different stakeholders, it can be generally divided into three phases: FEL 1 (identify); FEL 2 (select); FEL 3 (define)

Back-end loading typically consists of two phases: EPC (execute), and start-up and operation (operate).

Table 1: Project Lifecycle Main Phases:

Typical Phases:	FEL 1	FEL 2	FEL 3	EPC	Start up and Operation
Brief Description:	IDENTIFY	SELECT	DEFINE	EXECUTE	OPERATE
Content:	Concept Development	Conceptual Planning	Detailed Scope Definition	Engineering	Operation and Production
	Feasibility Analysis	Conceptual Engineering	Preliminary Engineering	Procurement
	Business Planning	Pre-FEED*	FEED*	Construction

With respect to EPC project logistics, the majority of planning and strategszing is performed/must be articulated during front-end loading phases. During this stage, the cargo envelopes in terms of maximum shipping dimensions and weights, feasibility of moving material and equipment from multiple locations etc. would be evaluated.

The cargo starts moving during the back-end loading – EPC phase. Successful logistics execution draws on the early preparation to perform to the baseline. To summarise:

– Front End Loading phase:

i) Plan - Define - Optimize

–  EPC phase (Back End Loading):

i) Deliver to baseline

The reasoning for and visualisation of the aforementioned stages is demonstrated by the ‘influence and expenditure curve for project life cycle’ as described in Pre-Project Planning Handbook, published by the Construction Industry Institute. It is illustrated in figure one with slight adjustments to reflect the project lifecycle phases described above:

The graph clearly illustrates the importance of front-end loading phases and their impact on the overall schedule and costs for projects.

Nevertheless, there are multiple practical reasons that do not allow projects to embark upon a thorough planning during the front-end loading phase. Even though the precise scope should be initially defined, it will be continually changed during project development. It is important not only to have proper change procedures in place, and a flexible mindset and attitude for all stakeholders.

As per Fluor’s own experience, the best approach is the combination of both these approaches with added optimisation during execution:

- Proper and detailed planning including scope and contract definition during front-end loading.

- Building a highly capable and efficient project ecosystem (including all the key partners and suppliers) that is dedicated to making the project a success, through cooperation and collaboration.

- Optimising the execution phase to proactively address situations and mitigate potentially negative impacts, both on cost as well as on schedule

An EPC project’s cost and schedule benchmarks

Nevertheless, the impossibility of developing perfect plans has been well documented in the context of projects.

McKinsey & Company in 2017, based on analyzing 274 projects with budgets exceeding USD1 billion, published the cost and schedule overrun figures, as detailed in table two.

Table two: Overview of costs and schedule overrun for project exceeding USD1 billion.

INDUSTRY	COST OVERRUN1	SCHEDULE OVERRUN2
O&G Downstream	53%	38%
Mining	53%	41%
Other Infrastructure	43%	63%
Transport	40%	63%
O&G Upstream	34%	41%
O&G Midstream	28%	69%
Real Estate	24%	85%
Average	37%	53%

¹ Cost overrun = (actual cost – budgeted costs) / budgeted cost

² Schedule overrun = delivery delay / budget duration

Further, McKinsey & Company, based on IHS Global Database, analyzed 137 projects and publicized the findings [10] with respect to project schedule delays in 2020:

Table 3: Overview of projects schedule delays

INDUSTRY	DELAYS IN PROJECTS (% of average)	NUMBER OF YEARS DELAYED (average)	NUMBER OF PROJECTS
Mining	60%	2.2 years	11
Oil & Gas	68%	1.8 years	55
Power	67%	2.0 years	3
Real Estate	92%	2.0 years	12
Transport	69%	2.3 years	44
Other Infrastructure	108%	2.8 years	12

According to another consultant, KPMG, which published Climbing the Curve; 2015 Global Construction Project Owner’s Survey, only 25 percent of analysed projects came within 10 percent of their original deadlines. Just 31 percent of the projects came within 10 percent of their budget.

Even though there are many reasons for these results, from many available surveys and publicized literature, it can be concluded that material and equipment readiness and delivery have an impact on the project schedule and costs.

According to EA Silver, writing in the timing and sizing of procurement and logistics actions in large-scale projects: ‘‘The performance of large-scale projects depends to a major extent on the effectiveness of decision-making in the materials management area’.’

Many other researchers and specialists confirm this in their studies, among them being Mary Bajomo et al., writing in the International Journal of Production Economics, who stated: “The importance of managing material procurement and logistics towards the success of construction projects cannot be over-emphasised. This is especially true to EPC industry.”

EPC project logistics finds itself in a unique position, which can be described succinctly by ‘the lever effect’ (see image below), and that despite being a small proportion of the project cost, logistics can impact a large part of procurement and construction costs, as well as schedule overruns.

In the second part of this series of articles, I will discuss EPC project logistics in greater detail at various project stages, together with logistics service providers’ involvement in the process. We will articulate how logistics can play a major part in becoming a value-generating function and move away from being considered a cost.