peg: cement project engineering

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PHE

Multiple Package Projects – A Solution for Investment In

Economically Difficult Times

Global Cement & Concrete Conference

Riyadh, Kingdom of Saudi Arabia

February 2010

Piet Heersche (P. Eng, MBA), Dr. Hans W. Meyer & Marc LambertPEG S.A. International Consulting & Engineering

GENEVA, SWITZERLAND



INTRODUCTION

• Market Developments and Suppliers are re-defining projectcontractual structures with significant impact on Project Quality,Time and Cost outcomes.

• Multiple Package and Semi-Turnkey contracting plans arebecoming more prevalent in the Middle Eastern and AfricanRegions (vs current turnkey contracting).

• Cement plants are major capital investments and require careful

planning, structuring and management. A month of delay inproject completion could result in 15,75 Mio. US$ losses (5000 tpdclinker production line, 100 US$/t OPC cement).

• Management of large capital projects is not core-business for

many cement manufacturers. Specialized support frominternationally recognized Consulting Engineering companies isessential to structure and execute projects.

• Optimized plant design (value engineering) through multiplepackage contracting can significantly reduce overall investmentcosts.

PEG S.A Head-office

Geneva, Switzerland



INDUSTRY TRENDS

• New entrants for small, mid and large capital projects, includingOEM’s and Contractors, have limited experience in themanagement and execution of cement sector projects.

• Full Turnkey Projects no longer ensure that Budget, Quality andSchedule expectations are met.

• Cement Manufacturers have reduced, or eliminated, in housecapital project management capabilities; Independent Engineeringand Project Management Expertise is needed.

• Volatility in labour and commodity markets continues; High projectrisk premiums commensurate with project scope and time

responsibilities remain.

• Owners access to project financing is resulting in project time lineswhich are operational cash flow and/or equity driven.



INDUSTRY TRENDS

• Supplier willingness to execute turnkey projects is diminishing;Current trend towards Semi Turnkey and Multiple Packageprojects is increasing in particular in emerging markets.

• In mature markets existing players are focusing on mid sizeoptimization and specialty projects (AFR, WHRS, etc.); thesebetter managed as multiple package projects

• Country specific pre-conditions (nationalization) for projectrequired labour, materials and supplies are becoming moreprevalent; a key social aspect.

• Machinery delivery lead times have decreased; Project critical

paths once again rely on competent and timely EngineeringExpertise and Deliverables

Turnkey Projects; Time, Cost and Quality are no longer assured



Market Developments and Key Project Stakeholders

are redefining Project Organizational Structures

Increased Owner Involvement/Risks with Changing Contractual Structures

Mult. PackageContracts

TurnkeyContracts

SmallProjects

LargeProjects

Semi-turnkeyContracts

Mid Size

Projects

…Suppliers continue

to pursue margins;

Selecting Clients,

Projects and reduced

contractualResponsibility….



Suppliers (and Contractors) are assessing Project Risks and

reducing Responsibil ity outside areas of Expertise and Control

Semi Turnkey Project

(4 Contract Partners)

Turnkey Project

(1 Contract Partner)

Multi Package Project

(Multiple Contractors)

P r o j e c t P r e m i u

m s & C o n t i n g e n c y

Equipment

Supply

&

M/E Eng.

Civil

Engineering

Local Manu-

facturing

Civil Works

&

Erection

Equipment

Supply

&

M/E Eng.

Civil

Engineering

Local Manu-

facturing

Equipment

Supply

Mechanical

Electrical

Civil

Engineering

Local Manu-

facturing

Civil Works

Erection &

Installation

Civil Works

Erection &

Installation

Own er E x p er t i s e / I nv ol v em e

n t



Phase IDefinition

Phase IIContracting

Phase IIIExecution

Phase IVCompletion

Phase VTransfer

For Capital Intensive Cement Sector

Projects Multiple Package (and Semi-

Turnkey) Project Contracting Provide

Tangible Benefits to the Owner;

Engineering Expertise and Project

Management Skills are Essential

~ 9 months

~ 21 months ~ 3 months

~ 6 months

~ 3 months

~ 24 months ~ 3 months ~ 1 month



OWNER SPECIFIC SELECTION CRITERIA (OBJECTIVE &

SUBJECTIVE) TO BE UTILIZED TO SELECT CONTRACTING PLAN

Turnkey Project Multiple PackageSemi - Turnkey

Supplier Will ingness

Plant Performance

Project Cost/Cash Flow

Project Schedule

Project Quality

Contractual Interfaces

Owner’s Resources

Owner Project Control

-



MULTIPLE PACKAGE PROJECT CONTRACTING - Benefits

• Owner Control over Engineering, Supply, Construction & Administration for acapital project is pre-defined; Essential Owner & external engineering andproject management resources can be identified and allocated.

• Optimal Selection of Machinery, Construction and Services Contracts andPartners in line with Owner‘s Preferences are determined.

• Simplified Project Definition and shorter duration (incl. Basic Engineering);adequate for Permitting and Budgetting; flexibility remains throughout

contracting phase.

• Elimination of upfront premiums in budgetting process; Project contingenciesare allocated however managed by Owner „as needed“ over the project

duration.

Phase IDefinition

Phase IIContracting

Phase IIIExecution

Phase IVCompletion

Phase VTransfer



CEMENT PROJECT MANAGEMENT

PHASE I – DEFINITION - FEASIBILITY STUDY (PAGE 1/2)

Market review, evaluation and future development

Financing with comprehensive pro-

jections, optimization of taxes and profits

FEASIBILITY

STUDY Analysis of the raw material qualities

Analysis of suitable material reserves

Site examination - plant location, infrastructure

Technical process definition for

mechanical and electrical key-equipment

Mass- and process flow sheets

Estimation of investment and operation costs con-

sidering the optimum execution structure

Ecological impact study for permit purposes

Financing with comprehensive pro-

jections, optimization of taxes and profits

Ecological impact study for permit purposesEcological impact study for permit purposes



Final project report with executive summary

Approval of the project by the Owner

PROJECT STUDIES

&

BASICENGINEERING

Project management and organization structureGeneral time schedule

Execution organization and definition of responsibilities

Technical plant concept with mass- and process

flowsheets, equipment specifications, storage

definitions, civil building descriptions

Drilling campaign (Analysis of raw materials and reserves)

Exploitation planning

Planning of quarry operation and process

Project structure, definition of contract

packages, assignment of responsibilities,

Introduction of possible suppliers and contractors


PHASE I – DEFINITION - PROJECT STUDIES AND BASIC

ENGINEERING (PAGE 2/2)




• Pre Qualification/Vetting of all potential contractual partners becomes a key

success factor for the Project Delivery & Performance.

• Value Engineering can be realized throughout Phase II (Contracting) and PhaseIII (Execution) in line with project specific requirements and/or local conditions.

• Most Suitable method for mid size upgrade/optimization projects within existingfacilities (including AFR, WHRS etc.)

• Increased (selection) pool of potential on shore and off shore contractualpartners.

• Shortened Project Schedule (Fast Track) can be implemented - ConcurrentPhase I (Definition), Phase II (Contracting) and, in part, Phase III (Execution).

Phase IDefinition

Phase IIContracting

Phase IIIExecution

Phase IVCompletion

Phase VTransfer




• Multiple Package projects allow Owners to better plan and manage cash flowand progress of a project; high relevance for projects which are operationalcash flow and/or equity driven.

• Optimum definition of contract Battery Limits in line with core competencesof contractual partners; result - improved quality of deliverables and ultimatePlant Performance.

• Indexing of Contracts to Labour and Material cost fluctuations can be

avoided; Contracts negotiated on a competitive basis at market rates (or lower).

Phase IDefinition

Phase IIContracting

Phase IIIExecution

Phase IVCompletion

Phase VTransfer




PHASE II – CONTRACTING (PAGE 1/2)

TENDERING

&

CONTRACTING Analysis, optimation and comparison as well as evaluation

of proposals from the potential suppliers

Submission and clarification of the tenders with

potential suppliers

Elaboration of tender documents reflecting international

standards for mechanical and electrical equipment supply,

engineering works, permitting works, civil design,

civil construction (steel and concrete), equipment

erection and local fabrication

Selection of suppliers

Elaboration of supply contracts according to international

standards and/or requirement from the banks

Contract negotiations and contract signature




PHASE II – PERMIT PROCESSING (PAGE 2/2)

Examination of local regulations

and lawsTHE PERMIT

PROCESSING Establishment of material, mass as well as

volume flow sheets and consumer lists

Specifications of dust, gas and noise emissions

And other invironmental and local impacts

Definition of civil techniques to be applied

according to the geotechnical results

Coordination and execution for the

transformation from foreign into Local codes(as required) for construction permitting purposes

Coordination of import licenses for equipment




• Project Risks spread over multiple contracts allowing for adjustment in caseof poor contractor(s) performance.

• Contracts awarded in project sequence at competitive market conditions; thisallowing Owner to achieve best Content/Quality for value

• Elimination of risk „premiums“ and direct management of „contingencies“

• Owner is in full control of project development and contractual deliverables

(both on shore and off shore). Rapid decisions and corrective measures toachieve project schedule targets can be made.

• Continued value engineering (including Constructability) considering locallimitations (logistics&transport, contractor capabilities, site conditions)

Phase IDefinition

Phase IIContracting

Phase IIIExecution

Phase IVCompletion

Phase VTransfer




• Owner has greater control over quality of engineering, supply and construction

activities. This validated through impartial/independent experts. In the currentmarket Suppliers and Contractors are taking „shortcuts“in order to meetcontractual schedule obligations.

• Project scope and content can be adjusted to changing requirements withoutmajor project disruptions and contractual re-negotiations (market adjustments,environmental laws & permits, etc.)

• Reduced Change Order Management typically associated with poorly defined

Turnkey Projects; For Multiple Package projects up too date (Just-In-Time)Engineering and Supply deliverables are available at award of on shoreconstruction and fabrication contracts.

• Local award & allocation of on shore contracts (supply & construction) mayresult in improved community and governmental relations.

Phase IDefinition

Phase IIContracting

Phase IIIExecution

Phase IVCompletion

Phase VTransfer




PHASE III: EXECUTION OF THE PROJECT (PAGE 1/2)

Control of the manufacturing quality of theimported equipment

PROJECT

EXECUTION(PROJECT

ENGINEERING

&

MANUFACTURING

CONTROL)Budget and project time scheduling with

detailed progress reports

Quality control according to specifications

Check and approval of the design drawingsrelated to mechanical and electrical equipment,

local manufacturing and civil works

Project coordination between equipment

suppliers, engineering and permitting

as well as other contractors

Control of payment according to the contract(s)

(delivery & work progress)




PHASE III – EXECUTION OF THE PROJECT (PAGE 2/2)

Quality control of local manufacturedequipment

SITE SUPERVISION

&

LOCALMANUFACTURING

CONTROL

Control and approval of equipment delivery

Quality control

Checking of construction and erection worksexecution according to drawings, specifications

and regulations

Project coordination on site between equipment

suppliers, engineering companies as well as

construction companies (civil and erection)

Control and detailed report on the actual execution

progress including follow up of the time schedule

Claims management and reporting




• Owner has improved control over timing, and quality, of commissioning

activities including allocation of OEM Resources.

• Machinery Performance Guarantees (and Warranties) are carried directly byOriginal Equipment Manufacturer (OEM) (versus an intermediate contractual

partner) resulting in improved commissioning support and after sales serice/spare parts supply

• O&M (if applicable) Contracts can be decided by the Owner on an idependent

basis; Turnkey contractors will attempt to link O&M discussions with the initialproject execution in order to secure long term business and income.

• Contractual closings are simplified and at the discretion of the Owner

Phase IDefinition

Phase IIContracting

Phase IIIExecution

Phase IVCompletion

Phase VTransfer




PHASE IV/V – PROJECT COMPLETION AND TRANSFER

Start up programme and detailed scheduling

START UP AND

COMMISSIONINGFinal checks of equipment and installations

Supervison of all « no load », signal, interlocking

and « load tests »

Elaboration and processing of deficiencies lists

Evaluation of performance tests results and

issuing the performance test and taking over

certificates

Supervision and coordination of performance

tests and control of specified design basis data

(raw materials and fuels)

Taking over certificates

Elaboration performance test procedures



CONCLUSIONS

• Multiple Package and Semi Turnkey projects allow Owners to directly influence& control Project outcomes; namely Time/Quality/Cost versus targets andexpectations.

• Through Multiple Package contracting lower investment costs can be realizedthrough « fast track » project schedules, eliminated premiums, Owner managedcontingencies, value engineering and competitive selection of contractualpartners.

• In the Development of Capital expenditure projects a systematic approach fromthe project definition through to completion & transfer is essential; This to avoidunexpected project deviations:

PHASE I: Project Definition (Feasibility studies, audits etc.)

PHASE II: Project Planning (Permitting, Tendering & Contracting)

PHASE III: Project Execution (QA/QC Site Supervision)

PHASE IV: Project Completion (Start-up, Commissioning, Taking Over)

PHASE V: Project Transfer (Operations, O&M Contracts)



CONCLUSIONS

• Multiple Package Contracting allows Owners to align the Projects progress anddevelopment with the available financial means.

• Contracting method is to be analyzed on a Project (and Owner) specific basisconsidering a defined methodology of subjective and objective criteria; key is thealignment of the overall project structure with the Owner‘s capabilites andwishes.

• Whether Multiple Package, Semi-Turnkey or Turnkey contracting, coordinationbetween contractual stakeholders requires Project Management Experience,Engineering Know How and Specialized Expertise throughout all project phases.

PEG S.A. as the leading International & Independent Consulting

Engineer covers all aspects required to successfully

plan and execute your Capital Projects



THANK YOU VERY MUCH

FOR YOUR KIND ATTENTION

FOR DETAILED DISCUSSION OF YOUR PROJECT OR INTEREST PLEASE DO

NOT HESITATE CONTACT US OR VISIT OUR WEB-SITE

www.pegeng.ch

peg: cement project engineering

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