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Procurement Risk for Large Machines – Industry Experiences and Current Issues

Engineering & Construction Risk Institute (ECRI)Greg Ramsay December 2015

05/2012

2PROCURMENT RISK FOR LARGE MACHINES – INDUSTRY EXPERIENCES AND CURRENT ISSUES

Contents

• Characteristics of Large Machines and Industry Experiences

• Procurement Risk Process.

• Risk Treatment Approaches

05/20122

• Summary

• Discussion– What are our collective experiences with large machine failures and root causes?

– What are our learning’s and effective risk mitigation strategies?

3CHARACTERISICS OF LARGE MACHINES AND INDUSTRY EXPERIENCES Imagine you are the EPC / EPCM PM and this failure has just happened on your project. What impact does this have on your project KPI’s and health, safety, client planned revenue, your client / customer relationship and your reputation?

05/2012

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4CHARACTERISICS OF LARGE MACHINES AND INDUSTRY EXPERIENCES These machines are complex with various construction and operational movements and load cases, they can be easily overloaded and result in collapse if there is inadequate design and/or critical risk controls and procedures.

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CHARACTERISICS OF LARGE MACHINES AND INDUSTRY EXPERIENCES Machine failures are not an “uncommon event” and the following Australian data shows 68 failures from 1977 to 2013. Given this failure frequency and the impacts from failure this rates as a High Risk issue for project management teams.

8

10

12

No

of

Fail

ure

s

Partial

Total

Total – machine needed to be replacedPartial – machine was repaired and

involved a significant recovery period

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0

2

4

6

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

No

of

Fail

ure

s

Year of Failure

Total

Reference: Richard Morgan, August 2013

CHARACTERISICS OF LARGE MACHINES AND INDUSTRY EXPERIENCES To aid our discussion and development of a possible Best Practice Guideline use the post-it notes during the presentation to jot down your experiences and learning's to aid in the achievement of the ECRI vision

“ To institutionalise sound risk management in the Engineering & Construction Industry with the objective of improving the performance and predictability of large capital projects, consequently enhancing the long term health of the E&C community and the value added to its Clients “

05/2012

CHARACTERISICS OF LARGE MACHINES AND INDUSTRY EXPERIENCES Typical features in the design, fabrication, transportation, erection, commissioning and handover of large machines that reflect some of the complexity that must be managed for successful delivery are:

Typical features and risk issues include:

• Long lead times that need to be managed• Tendering ~ 3 months• Design ~ 8 months• Fabrication and Transportation ~ 11 months• Erection & Commissioning ~ 6 months• Handover ~ 3 month

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• Specifications can be complex and there are various international design codes

• Design periods can be longer for custom designs.

• Significant cost - risk decisions required in the procurement process

• Supply chain involves many global participants – supply chain risk

• Can be on the critical path of projects – impacts to EPC/EPCM cost and client revenue

CHARACTERISICS OF LARGE MACHINES AND INDUSTRY EXPERIENCES The market dynamic has been changing (Sandvik a traditional Supplier has exited the market) with many machines being procured out of China, with an increasing use of modularisation. The following information is based on Hatch’s experience through our specialist Structural Assets Group lead by Dr Logan Loganathan.

Some of the Chinese Machine Vendors

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• ZOOMLION• Huadian Heavy Industries (HHI)• Northern Heavy Industries (NHI)• Dalian Huarui Heavy Industry Group Co., Ltd (DHHI) • Shanghai Zhenhua Heavy Industry Co., Ltd (ZPMC)

CHARACTERISICS OF LARGE MACHINES AND INDUSTRY EXPERIENCES Modularisation offers benefits of offsite labour cost, productivity and quality but introduces risks that must be managed in the design, quality, fabrication, transportation, logistics and erection phases.

05/2012

CHARACTERISICS OF LARGE MACHINES AND INDUSTRY EXPERIENCES The China procurement route presents a classic risk decision where cost and schedule opportunities must be assessed against the cost of risk treatment actions as well as the remaining residual risk cost exposure. This decision must also include schedule risk.

Cost Saving A$19 m

A$ 1.2 m

A$ 6 m

A$ 3.4 m

A$ 1.2 m

Unmitigated Total Cost – i.e. no risk mitigations

6 8 0 2 4 6 8 0

Mean = $11.5mP75 = $12.8m

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Traditional Option China Option

Hatch Risk Mitigation

Detail Structural Design Review

Design,Supply,Installation and No-load Commissioning

A$ 71 m

Co

st (A

$ )

A$ 45 m

A$ 3.4 m

(Total A$ 73.4 m) (Total A$ 54.4 m)

6 8

10

12

14

16

18

20

Reference: HATCH Analysis

The above profile represents the residual cost risk profile after implementing the risk mitigation actions, that must be managed and/or improved.

PROCUREMENT RISK PROCESS The process involves an integrated commercial risk assessment of submitted bids to assess the cost and schedule risk profiles as an input to the bid decision. The process provides the Project Team with a risk register and quantification of risks for the selected Bid that must be managed in the Execution Phase

05/2012

Reference: Yuri Raydugin

PROCUREMENT RISK PROCESS Specific challenges for overseas procurement of large machines that need to be assessed to capture the benefits. Key questions include how can we improve predictability of the final deliverable and reduce risk exposure. Risks in these areas must be identified during the procurement process and managed in Execution.

Tendering Design Fabrication Logistics Erection & Commissioning

Handover

Operator / Owner Requirements

Project & Technical Specifications • design, material and quality

• Design standards• Configuration

OEM design experience and competency

Design processes, tools and documentation -language

Design review

Material quality

Workmanship

Fabrication procedure quality e.g. welding

Lifting – required studies and

Dimensional and weight limitations -sea and land transport

Security duringtransport

Lifting studies

Balance and stability of the machine

Staff training

Interface issues

Compliance with tolerances

As-built drawings

Quality of the Operating Manuals

Quality of the Maintenance Manuals

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• Configuration• Performance• Modularisation• Interfaces

Lessons Learned

Design review processes

Knowledge of chosen design standards and specifications

Knowledge and experience in compliance with local regulations (e.g. Electrical)

Constructability

studies and procedures – sea and land

Trial assembly for stick build and modular components

Protective coatings quality

Transport studies

Transport Authority regulation compliance issues

tolerancesSpare part components

PROCUREMENT RISK PROCESSThe Hatch QRA Process involves the identification, quantification and integration of schedule and cost uncertainties and risks to produce an overall cost risk profile for the Bidder Package. This information is used to compare bids and agree the key cost drivers and risk mitigation actions. This profile is typically

updated on a quarterly basis.

Package Cost RiskPackage Schedule Risk

Duration

Time Dependent

Risks

Time Independent

Risks

Integrated

Resources – Burn Rate Hourly Rates

PACKAGE SCHEDULE AND COST RISK Risk Register - Threats, Opportunities and Uncertainties

2. Integrated schedule-cost risk analysis

Tender Risk Analysis

Machine Design8 months

Assumptions- Time variable cost – Project Team is $500k / week- Revenue not included in the analysis

Inadequate electrical design

HAZOP and SIL –Undertaken

with integrated

team.

Inadequate structural design

Inadequate mechanical

design

Poor communications

Late Vendor data

Lack of HHI resources

Errors picked up in design

reviews

+4 weeks+2 EC&I Engs in China for 6 months$1.2m –incorporated into mitigation already

+2 months – in parallel with resources+2 Engs for 1 month$130k

Errors picked up in the design basis+4 weeks in parallel with Elec+1 Mech Eng in China for 1.5 months$70k +2 Engs for 6

months$600k

RAMBOHAZOPS

+2 weeks+2 local Hatch China Engs$104k$120 interpretor

+4 months Ie approx 16 weeks

Hatch needs data for other design

Installed power

Data interface-SCADA

Wheel loads -Structural

Re-mobilise resources if

late

Third party review

AS4324 issues+ 4

weeks

7 Senior Engs for 9 weeks @ 50%$315k

12 weeks 11 weeks

Mech 12 weeks

Structural

Overlap

Vendor & ABB

NOTES:

TOTAL WEEK DELAY = COMM – 2 Now 2ELECT – 4 Now 3 HAZOP – 2 Now 1

1. Risk Assessment Workshops– Influence Charts

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Variable CostsIntegrated

Package ScheduleCost Risk

� Proper definition of estimate accuracy and contingency - benchmarking

� What is the probability of exceeding the baseline estimate?

� Where is the package risk and what is driving it?

� Which Bidder do we select?

� How do we best optimise value?

- 10% + 10%

Bidder ABidder B

Baseline Est.

Bidder A: 90% Probability of being within 10%

Bidder B: 60% Probability of being within 10%

P50

Contingency

3. Risk profiles for decision making4. Key risk drivers for monitoring and mitigation

March 2012

Revenue not included in the analysis- Owner to check the schedule and OPEX impacts in their NPV model as part of the decision process

- Vendor Risk Assessment Based on Set Mitigations- Willingness to work with Hatch- Available Resources

RANGINGMIN = $0.5m (1 week)LOW = $1.0m (2 week) @ 10%HIGH = $2.0m @ 60% (4 weeks)MAX = $6.0M (12 weeks)

Vendor & ABB COMMUNICATION MECH – 4 Now 4

STRUC – 4 Now 2

TOTALS – 16 Now 12

3 MONTH BLOW OUT @ $500k - $6m

RISK TREATMENT APPROACHES Risk treatment is most effective when started early with key risk management activities, interventions and hold points then included and allocated in the contract. Key questions include how can we improve predictability of the final deliverable and reduce risk exposure.

Tendering Design Fabrication Logistics Erection & Commissioning

Handover

Assistance with preparation of tender specifications

Selection of theappropriate design standard –AS4324.1, ISO5049.1, FEMII

Review and

Detailed design audit- Design adequacy and compliance

- review of 3D model

- Constructability and critical procedurereviews

- Loads reviewed that will be used by other

Quality control and quality assurance by 3rd

party company

Vendor Quality Surveillance (VQS)

Lifting studies

Transport logistic study

Review of Shipping / Transport Plan- Ship packing list

- Dimensions & weights for stowage plan

Machine weight and balance –witnessing of weighing / balance measurements and calculation reviews

Review of handover documentation and spare parts for completeness and quality

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Review and confirmation of key dimensions, configuration and performance that can be achieved

Assistance with Tender evaluation

Risk Management Plan

by other designers

- Interface definition –wheel loads on substructures

- Safety and access requirements

- Specialist risk reviews – HAZOPS, FMECA, SIL

Co-location of review team with the Chinese Vendor

Fabrication procedure reviews – e.g. Welding procedures

stowage plan- Design review of lifting and lashing lugs

Lifting and critical procedure review and/or studies

Load security reviews

Risk Profiling, Reviews, Monitoring and Reporting across the Life Cycle

RISK TREATMENT APPROACHES Design reviews and technical risk assessments are essential risk mitigation strategies and nearly all problems can be traced back to fundamental design issues. This can be mitigated through the use of 3rd

party design reviews using an experienced specialist design review team.

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RISK TREATMENT APPROACHES Given the long duration of large machine contracts risk management activity and intervention needs to be planned for each phase to provide a holistic approach to maximise the delivery success of the machine contract for all stakeholders

Tendering Design Fabrication Transportation Logistic

Erection & Commissioning

Handover

Detail Design Review Team

Site Mitigation Team

Detail Design Review Team

Detail Design Review Team (as required basis)

(3 months) (3 months) (6 months) (3 months)(8 months) (8 months)

05/2012

Vendor Quality Surveillance (VQS) and QA/QC Team - Third party company

*The above durations are estimate only and the final schedule is subject to the vendor in China

SUMMARY AND CONCLUSIONS “A rising tide lifts all boats” - as an industry we need to improve the performance and reliability of the delivery of large complex machine contracts – the risk management and mitigation investments to improve delivery makes business sense for both the E&C industry and our clients.

Large mobile machines and other like equipment are:• Complex design, fabrication, erection, commissioning and handover project activity;• There are many key stakeholders and often a large supply chain; and• They are long duration with opportunity for change and unexpected events.

The market is changing with emerging Chinese groups and a long standing group (Sandvik) exiting the industry.

Sound and specific risk management is required early in the procurement cycle to:• Select and develop appropriate specifications for the machine;• Develop appropriate control and review points in the contract and transfer appropriate risk;• Assist in the procurement decision by risk profiling the bidders;

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• Assist in the procurement decision by risk profiling the bidders;• Develop risk mitigation plans throughout the machine procurement life cycle

• Design, fabrication, logistics, erection, commissioning and handover• Develop performance standards that can be audited for critical controls

Third party design review by specialist engineers is a critical risk management and risk control action

Review teams consisting of design, fabrication, logistics and site specialists should be considered as part of the risk management plan, especially for review of critical procedures

The risk register developed in the bidding phase must be continually reviewed, updated and any significant failures analysed

DISCUSSIONWhat are our collective experiences with machine failure, the root causes and from our Lessons Learned the effective risk mitigation actions that should be used to improve the predictability of these major contracts on our projects?

05/2012

THE HATCH STRUCTURAL ASSETS GROUP AND RISK MANAGEMENT GROUP ARE ALREADY ASSISTING INDUSTRY PARTNERS The Structural Assets Group has established best of class E&C experience and skills across a wide variety of complex machines and equipment to assist Vendors, E&C Companies and Mining and Industrial Houses.

05/2012

Risk Management GroupGreg Ramsay – Hatch BrisbaneTelephone: +61 7 31667757E-mail: [email protected]

Structural Assets GroupDr S Loganathan – Hatch BrisbaneTelephone: +61 7 31667739E-mail:[email protected]

20PROCUREMENT RISK FOR LARGE MACHINES – INDUSTRY EXPERIENCES AND CURRENT ISSUES

• Discussion Brainstorming from the Group

–What are our collective experiences with large machine failures and root causes?

05/201220

–What are our learning’s and effective risk mitigation strategies?

21

PROCUREMENT RISK FOR LARGE MACHINES – INDUSTRY EXPERIENCES AND CURRENT ISSUES

Inadequate design of an elevated flare gas structure resulted in

rework and associated extra costs and schedule impact

• Root Cause

Elevated Flare structure not designed for cyclone wind conditions –

05/2012

issue not spotted until after erection (but prior to any failure).

• Risk Mitigation

Design was subcontracted to supplier. Supplier failed to follow spec – probably copied another design. Issue not picked up in design review phase. Need to deliver thorough assurance in home office.

22


Cold / cryogenic insulation issues on imported modules resulted

in rework and associated costs and schedule impact

• Root Cause

Cold insulation not properly installed on modules despite QC sign

05/2012

off. Problem identified after installation on site (but prior to start –up)

• Risk Mitigation

All procedures and spec’s were okay. Comes down to people.

23


Use of asbestos as temporary protection material on modules

resulted in quarantine delays

• Root Cause

Asbestos included as temporary protection materials on modules

05/2012

during transportation despite prohibition in tech. Resulted in modules being quarantined upon delivery.

• Risk Mitigation

Spec’s have to be a clearer on prohibitions on both permanent and temporary works.

24


LNG refrigeration Compressor

Blade Damage at Commissioning and Major internal Damage

• Root Cause

Debris left in machine at close-up

05/2012

• Risk Mitigation

Cannot rely on vendors clean-up/close up. Procedure – T.Pinspection

25


Major Compressor

Blade Cracked during initial operation delaying handover

• Root Cause

Blade design was first of a kind (FOAK) – unknown contractor

05/2012

• Risk Mitigation

Ensure Vendors are obliged to advise FOAK issues / activities

26


Seal Failure on Major LNG Compressor Unit

• Root Cause

Vendor’s sub supplier of seal material did not meet specification upon post review – cost start up issues

05/2012

• Risk Mitigation

Testing review of standard material specification of the actual material prior to assembly

27


Failure of PSV castings results in extra costs and delays

• Root Cause

PSV castings failed – thought we were procuring from reputable

05/2012

vendor, but items were subcontracted to 3rd level sub vendor, quality review was not fully implemented

• Risk Mitigation

Testing review of off the shelf common items now mandatory

28


HDD Machine Failure

• Root cause

- 2-4 weeks for repair / delivery of replacement

- de-mob / mob costs to move crews / equipment etc to another area while awaiting new machine

05/2012

new machine

- permits affected

• HDD Risk Mitigation / Lessons Learned

- Redundancy plans

- Contingency to cover added costs for de-mob / re-mob

- Attempt to keep HDD’s (or other types of speciality equipt) off critical path

29


Power plant off-gas Treatment System

Failure: Catastrophic failure of new off-gas blower

Phase: Final Testing and Start up of overall system

• Root Cause

05/2012

Improper installation of bearings following fabrication and vendor quality checks (bearing was removed for lubrication prior to shipping)

• Risk Mitigation / Lessons Learned

Extensive Vendor surveillance and testing was done before accepting the fans. However oversight ended after capacity tests and did not do final checks.

30


Process Plant, main compressor oil pump broke. Start up postponed by one month

• Root Cause

Shaft mis-aligned due to different reference points in two drawings

05/2012

• Risk Mitigation

Quality control check updated before start up

31


Acceptance and Facility Turnover requirements “short circuited”

by the Owner

• Root Cause

05/2012

Client Execution and operation of facility before final acceptance and turnover

• Root Cause

Unqualified Owner Operators

32


TBM Failure

- Inadequate soil borings

- FOAK size / use / depth

05/2012

Tunnel Collapse during excavation

- Construction technique not in compliance with Engr.

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