The current global uncertainties coupled with constant price rise have been eroding the profit of every industry, and the EPC sector is no exception to this phenomenon. Against this backdrop, EPC companies have to chalk out new plans to address the issue of profit erosion. They need to realise that streamlining or revamping one area will not solve the entire problem. Steps need to be taken across areas and only then bottom line can be proved. Assessing the situation, some EPC companies have already adopted new strategies or are in the process of revamping existing strategies right from procurement to skilled manpower. Project management is challenging because it involves many internal and external companies, multiple variables, and specific requirements to be considered in the daily operations.
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Efficient sourcing strategy can bring in cost benefits, which ultimately help improve bottom line of companies. But it is not that easy. Strategic sourcing is a rigorous process by identifying the right supplier. The right source need not always be the cheapest or the highest quality supplier, rather it should be one that can offer maximum benefits. Of course, maintaining quality is a forgone conclusion. In order to drive the best advantage from strategic sourcing, the contract must be for at least three to five years. Sourcing for longer period always aims at reducing the cost of doing business and not just ensuring a lower price.
“In an industry where margins are relatively low and costs high, robust procurement strategies and precision engineering will help drive down costs for contractors and mitigate the risk of price fluctuations. Pre-bid engineering for correct and precise engineering inputs at bidding stage is critical. In the Indian context, tighter focus on quality and strict control of wastage during construction together with elimination of rework are areas to be exploited for cost reduction,” points out Alwyn Bowden, President & CEO, Essar Projects India Ltd.
Taking proactive steps
Against the backdrop of steep price rise, Linde Engineering has taken few steps to address the issue. First, major emphasis is given to streamlining of minimum specification requirements as well as the best cost sourcing arrangements on longterm relations with various suppliers and agencies. It has also negotiated contractual provision of uncertain commodity price. “Basically, contractual provisions are being negotiated for uncertain commodity price variations, which affect plant equipment/material cost. Most of the clients are appreciating this fact and agreeing to these provisions for a smooth execution of projects,” claims G R Singh, Vice President, BD, Sales & Execution, Linde Engineering India Pvt Ltd.
The company also reviews execution strategies of projects. He adds, “We also review our execution strategies to cut down time cycle of project implementation as well as put up an effective change management system in place to control and avoid unwarranted changes causing time & cost implications on projects.”
According to Biswanath Bhattacharya, Director, KPMG India, price rise is a significant contributor to profit erosion in EPC projects, especially for long duration contracts. “This can be managed to some extent by investing in research and tracking of commodity prices. The current mechanisms of adjusting EPC price based on commodity prices usually do not cover the whole risk for EPC players. One way to tackle this issue includes focussing on the other parts of the EPC project cycle to ensure that profitability is not impacted,” he says.
Greater focus should be on managing procurement costs, including broader vendor development; a rigorous approach to design and engineering efficiency; and reduction in design cycle time to ensure that orders for equipment are placed without any delays. In the Indian context, perhaps the main risks for contract implementation are those associated with vendor deliveries, interface management, and external issues such as taxation, procedures and State, Central level legalities etc. Logistics is another area, which needs more focussed approach. It is because logistics plays an important role in the completion of projects on time.
Another area of concern is dearth of skilled manpower. Project management is critical in executing complex projects. The people involved in this should have the knowledge of using modern programming tools integrated to track progress of all projects to ensure timely completion within budgeted costs. Site management is another critical factor. Having skilled and experienced manpower is also crucial while selecting a contractor. “Apart from rising costs, higher level of receivables and lack of skilled manpower are also areas of concern. As measures to improve profitability, EPC companies are looking at enhancing their project management capabilities, upgrading technology and procurement management process, better logistics management, implementing ERP solutions etc,” observes Savan Godiawala, Senior Director, Deloitte India.
Again it is all about survival of the fittest. Looking at the ongoing activities, the future of EPC industry is expected to be bright, though challenging, in India. What is imperative here is that each EPC company will have to develop its own strategy for maximum profitability and success. Last but not the least, imparting training to employees and retaining them will play a decisive role in the success of an EPC company.
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