Establishing a Better Agreement Between EPCs and Producers

Everyone is looking for the best value. Engineering, procurement, and construction firms and the companies that hire them want to spend their money in a way that they make as much profit as possible. That’s business. But, of course, how they make profit is different. So, while the relationship between EPCs and the companies they serve is necessary and beneficial, the end result may be less than optimal if things aren’t arranged properly from the outset.

EPCs earn money by retaining as much margin as possible during a project, i.e. by keeping engineering hours to a minimum, by purchasing less expensive equipment, by using supplier B instead of supplier A, etc. Their client, on the other hand, earns money from what the EPC builds, and the better the equipment, the better the construction, the better the layout, the greater the chance they’ll earn more on their investment.

The client, therefore, stands to benefit from more engineering hours and more expensive equipment (high-tech and top performance don’t come cheap), the opposite of what will benefit the EPC. Of course, a top-performing portfolio will aid an EPC’s reputation. Well-performing plants make sense in the long run. But short term, the goals of EPCs and those of their clients conflict.

To be clear, we aren’t suggesting that EPCs are acting unethically by watching their costs. They have to work within their budget, and they have to remain profitable. They’re limited in what they can spend. EPCs, as a whole, aren’t out to rip off their clients.

It’s no one’s fault in particular that problems exist in the typical arrangement between EPCs and their clients. The problems are in the arrangement itself. They begin with the budget and initial requirements for the project. If the budget is too low, the EPC will have no choice but to purchase lower-quality equipment. And if the client hiring the EPC provides broad requirements, it’s at the EPC’s discretion to purchase whatever machinery will allow the plant to pass inspection, whether it’s top-performing machinery or not (and it’s usually not).

Say a customer requests bids on a 400,000 ton-per-year pellet plant and provides few specific requirements. The EPCs bidding on this plant can’t win by providing a high quote. They win by supplying the lowest bid. As a result, once they’re chosen, they can’t afford top-performing equipment throughout the plant. Their budget is simply won’t allow it.

To stay within their budget, EPCs will often opt to cut costs at the material handling equipment by purchasing lower-end machines. They instead prioritize islands of production equipment. Only near the end of the project will they focus on tying these islands together—with a conveyance system that fits the budgetary leftovers.

But this is a bad idea. If the conveyors perform poorly, they become a bottleneck to production (and, therefore, profitability). In extreme cases, they can lead to total plant failure (you know the examples). Bad conveyors have put millions of dollars of investment at risk.

To be fair, perhaps in their experience EPCs have found conveyors the easiest place to cut costs. Then again, perhaps cutting costs at material handling systems is just the go-to solution, so it may simply not occur to EPC engineers to look for savings elsewhere.

A Better EPC Arrangement

The client-EPC arrangement doesn’t have to involve such problems, however. A better arrangement is possible. It begins with an educated client.

Producers: Make sure you and your in-house engineers know what systems work best for your application and what’s state of the art. Such knowledge requires you talk to manufacturers, not just EPCs. EPCs are generalists. Each of us can keep informed on one or two things well, but that’s it. So, if you want the best results at your new plant, you need to procure the advice of the people who work with the systems and components you’re looking to purchase. Ask the conveyor guy what the best conveyors are—not the pellet mill guy. Likewise, don’t’ ask the conveyor guy what the best pellet mill is. Why should he know?

On a similar note, don’t expect an inexperienced group to design your plant well. The people who should put together the requirements for your projects and tie everything together are your in-house engineers. They know your product and processes better than anyone. They’ll make sure you get the best results.

Therefore, consult with your engineers and have them write specific requirements for your project before you request bids. For example, specify “We want an Andritz Model X” or “We want galvanized M-Series conveyors from Biomass Engineering & Equipment.” Only after spelling out the requirements should you bid out the project. The EPC that bids low to the requirements you know will give you a top-performing plant may be worth considering.

Be a Better EPC

On the other side of the equation, EPCs: Prepare yourselves to best serve your clients by learning about the latest technological advances from vendors, and explain their benefits to your clients. You want your clients to succeed after you’re through, and you want the project to reflect well on your firm. Of course, you’ll give your client what they ask for, but you can do your due diligence by informing them about the risks of a sub-par system.

Whatever the case, there’s no excuse to remaining uninformed. It disturbs us that some EPCs actually refuse education about our SMART Conveyors. When an EPC chooses not to learn about the latest advances in conveyor technology, we wonder what else they’re neglecting to learn: Advances in safety? Efficiency? Emissions controls?

Your customers are looking for value, and you’re looking to deliver it to them within their budget. We understand the balance isn’t easy because you’re working with limited funds. Just make sure you don’t place too little value on conveyors. You don’t want to deliver failure. It’s not worth the damage to your reputation (or the entailing lawsuit).

Get the system that will provide the best performance and highest return on investment.

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