OverviewEmbarking on a major project within the resources sector is a high stakes, high risk investment and years are spent in ex-ploration, geotechnical studies, feasibility studies, and sourcing funding, in an effort to establish a productive mining opera-tion that will generate sufficient financial returns to attract investors to the project.

In this discussion, we consider the role that key suppliers play in a traditional En-gineer, Procure, Construct, Management (EPC/EPCM) style project delivery model when compared with ABB’s Enterprise Value project delivery model. ABB’s En-terprise Value model suggests that sup-pliers of key systems, products and ser-vices can add significant value to a project if engaged earlier in the project lifecycle. We will also be drawing synergy from the United States Construction Industry Insti-tute (CII) study “Measuring the Effects of a Step Change in the EPC Process” con-ducted back in 1998.

Based on both the findings of the CII study and projects ABB have delivered through-out the world, we can show that consid-erable savings can be achieved at both CAPEX and OPEX phases of a project in relation to the power and automation scope. It is this key supplier involvement that we define as ‘Enterprise Value’.

Figure 1 shows a pictorial breakdown of the cost elements of the electrification and automation scope of a mineral process-ing project under a traditional EPC/EPCM model. It also raises the question of the possible savings if implementing the ‘En-terprise Value’ approach.

The CII study suggests a modification to the traditional EPC/EPCM model through the adoption of what it refers to as the ‘PEpC’ (or Enterprise Value) model, will deliver project benefits. ABB’s Enterprise Value Model is derived from the EPC/EPCM model and is not intended to re-place it, but to enhance it.

Improvements in areas such as time, cost, quality, operational performance and risk, will ultimately provide a significant im-provement in the projects NPV and with-out doubt, there is sufficient evidence to prove that by engaging key suppliers early, this approach will add considerable value to a project.

How can key suppliers add value to major projects? Financial decision makers strive to ensure that all investment decisions related to major projects will yield maximum value creation for the company. Extensive stud-ies, (prefeasibility, feasibility, etc) and eval-uation of numerous competing alterna-tives are generally undertaken in an effort to identify the best investment opportuni-ties available to a company - and indeed the best method of delivering any specific project.

Within the resources sector, decisions can involve millions of dollars of capital in-vestment often with extended periods of negative cash flow before a project may breakeven, let alone return meaningful profits to investors.

ABB ‘Enterprise Value’An alternative approch to project delivery

In this article Steve Hollyoak considers the issues associated with building capital assets for mining resource projects. Steve looks at the traditional methods used to source and procure key elements of a project and offers an alternative approach to take full advantage of time and cost savings available from early engagement of critical equipment suppliers.

The further a project moves along the traditional procurement process, it lessens your ability to influence the outcome of an improved Net Present Value (NPV) by limiting access to the latest technology, reduced potential cost savings in capital expenditure and optimum engineered solutions remain undiscovered.

Figure 1 : Traditional Electrical and Automation Scope

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Enterprise value

The inherent risks and complex nature of the capital equipment needed to extract the target mineral from the ore deposit means project financiers often require the engagement of a substantial EPCM con-tractor to assist with design, project man-agement and construction of the process plants and materials handling equipment.

‘EPCM’ describes an essentially linear process employed for the construction of a large project. (Figure 2) Broadly speak-ing, the EPCM model will require several engineering studies to determine the most appropriate and cost effective method of extracting the mineral(s) from the ore.

From a contractual perspective, the use of an EPCM contract provides a single point of responsibility for all elements of the project construction. EPC/EPCM con-tracts also generally encompass other assurances that lenders are seeking in-cluding: technical risk; process expertise; performance guarantees; non perfor-mance penalties; strategic procurement; fixed completion price; and a fixed com-pletion date.

After a feasibility study, the project enters a detail design stage and using the model, will reduce the project to logical and man-ageable elements by means of a Work Breakdown Structure (WBS).

Engineering disciplines (process, mechan-ical, electrical, etc.) will then be assigned to produce engineering reports detailing specific requirements of the project as de-fined by the WBS. The output of the engi-neering phase is a comprehensive set of specifications, documents, drawings and plans that will be used for procurement of equipment and services.

Procurement or tender packages that specify the equipment or services required are then made available to the market for tender. Numerous submissions are then laboriously compared to evaluate the re-sponses and negotiate commercial terms and conditions and award packages of work to successful bidders.

The procurement process is intended to ensure that throughout the construction of the capital asset, market forces are at work and that the project sponsor is able to purchase the specified products and ser-vices at the most competitive price. While

there may have been some limited input from project-critical suppliers through the engineering phase, often the first real op-portunity those suppliers have to add val-ue to the project is by making suggested improvements to the design specification during the procurement phase. Generally, this is only by means of presentation of an alternative (non-conforming) proposal.

Figure 3 illustrates the relationship be-tween the ability to influence design, (red dotted line), the effort required at each stage of the project lifecycle (blue lines), and further matched against the envis-aged project cashflow (orange line).

In its simplest form, the ‘effort curve’ is certainly not uniform, with significant peaks requiring additional resource as the project ramps up, and that the ability to influence alternative outcomes becomes

almost impossible beyond feasibility. Of course, financiers require some level of stability in releasing project funding at this point in the project lifecycle, but all too of-ten key suppliers are not sufficiently en-gaged at this point in time.

Strategic’ Procure, Engineer, procure, Construct (PEpC) ‘Enterprise Value’. Enterprise Value is the term given to the modified EPC process where key suppli-ers are contracted early on in the proj-ect lifecycle before engineering. The En-terprise Value model allows suppliers of project-critical equipment and services to influence the design and specification of the plant leading to lower capital cost, short project delivery times and improved plant performance.

“P”: procurement of major critical ele-ments which define the engineering

Figure 2 : EPCM Linear Process Model

Figure 3 : Project Management and Control

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Enterprise value

effort; “E”: the main body of engineering for the

rest of the project; “p”: the procurement of remaining mate-

rials based on engineering“C”: construction

The CII study found that the impact of an Enterprise Value model resulted in sched-ule improvements of 10 to 15 percent and savings in capital ranging from 4 to 8 per-cent.

Figure 4 shows that by breaking down the functional aspects and their respec-tive need (or value) in both the traditional model versus the Enterprise Value model, we identify time and cost savings over the project development period and the increased input and involvement of a key supplier.

Figure 5 shows the benefits that include a smoother and reduced resource require-ment due to the ability to influence the project outcome earlier, resulting in less effort, over a reduced time period and at a reduced cost. There is also the potential to deliver earlier cash flows to the owner.

Savings attributable to the Enterprise Value modelOur research shows that typically, the electrification and automation scope rang-es somewhere between 5 - 9 percent of total project CAPEX, excluding major in-frastructure components such as rail.

Of the functional aspects of the project de-livery, there are five major areas of scope forming the Electrification and Control (E&C) CAPEX expenditure: Engineering; Project Management; Equipment and Pur-chasing costs; Installation and Construc-

tion; and Commissioning and Startup. (see figure 6)

ABB has implemented the Enterprise Val-ue model in various locations across the globe, and Figure 6 details the savings attributable when the Enterprise Value model was utilised on a major coal project executed in 2005. Since then, ABB has used this delivery model for projects such as the Creighton, Stobie 9, Totten South and Garson mines and achieved overall reductions of between 15 – 25 percent approximately in the Electrification and Automation CAPEX budget.

Implementation of a ‘Strategic’ Enter-prise Value model Adopting an Enterprise Value approach does not preclude competitive market-forces. Rather, it puts the onus on ven-dors to demonstrate how their integrated

Figure 4 : Functional aspects of Enterprise Value Model vs. traditional EPC

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systems will result in maximising the value of the project through:

product integration; -

ing;

efficiency and availability;

The CII recommended developing a pro-curement and contract strategy specific for each key system in the scope of supply that leverages the real value of key sup-pliers and ensures the best commercial outcome of a project.

These recommendations were: 1. Identify the strategic procurement

items and/or systems critical to proj-ect success.

2. Identify members of the initial project team who will lead in the selection and procurement of each strategic pro-curement item and/or system.

3. Develop a detailed procurement and contracting strategy suited to each strategic procurement item and/or system.

4. Identify possible suppliers with the core competencies required by the unique nature of the project and each strategic procurement item and/or system.

What is critical here is the strategic intent in the procurement process and the focus on value rather the component price.

According to the CII study, an important element of an Enterprise Value process is the development of a procurement strate-gy suited to each specific item or a system and then identifying the core competen-cies required of prospective vendors rela-tive to these strategies.

Such an approach requires the vendors to demonstrate how they contribute to the project through leveraging on their do-main expertise and, for instance, through efficient communication between key sup-plier packages, for example, major me-chanical suppliers such as SAG and Ball mill suppliers and electrical / automation system suppliers.

The strategy may also include innovative contracting methods such as open book / agreed margin contracts and or par-tially funded detailed design, followed by a fixed construction phase or some other negotiated contracting method that facili-tate appropriate allocation of project risk and agreed profit margins.

The net result is often realised in fewer contractual interfaces and improved infor-mation flow amongst key system suppliers leading to more efficient project delivery, reduced overall costs and better quality outcomes for project investors.

Conclusion:Despite acknowledging that key suppliers can present significant value to projects, some of those who are responsible for project cost management, feel they could be at risk of being exploited through non-competitive procurement practices.

This, in fact, is not the case with early engagement of key suppliers and does not require the abandonment of competi-tive bidding practices. The CII study ad-dresses this perception and states, “... the basis for competition should focus on a supplier’s ability to deliver greater value to the project rather than simply the lower or lowest price”.

There are a number of paradigms we could use to sum up what we refer to as ABB’s Enterprise Value model, however, Albert Einstein quite famously said, “We will never solve the problems that plague our world if we employ the same logic that we used to create them.”

Figure 5 : Enterprise Value (PEpC) effort/cost influence curve

Figure 6 : Cost Components, Traditional vs Enterprise Value