Published: The Economic Times, January 2, 2014 The last few quarters have been tough for most Engineering, Procurement, and Construction (EPC) companies. Advances from new projects are going down, while collections from running projects have been poor. The net effect is increased borrowings with associated interest costs, which are denting  companies’ profitability. On the face of it, it looks like a macroeconomic crisis beyond  companies’ control.However, analysis of operating-level performance of EPC companies shows a high correlation between an ‘internally controlled’ variable – the project execution lead time (and delays), with margin erosions and working capital requirements. When site closures are grossly delayed, the direct cash outflow from missing material and site expenses balloons, and the final part of the receivables linked to site handover is delayed.Regardless of external conditions, EPC companies stand to gain in margin control and receivables management by improving the rate of project closure, or, in other words,  the flow of projects in execution.  <h2>Obstacles to improving flow</h2>Improving flow is not about special expediting efforts on a specific project. It involves acquiring the capability to reduce lead times of all projects as a process. When delays are caused by customer scope changes or hold-ups in approvals and clearances from external agencies, reducing lead times seems impossible. However, hidden behind visible external delays are those caused by internal factors.  <h2>Management by Turnover: The biggest waste</h2>Most EPC companies are obsessed with meeting turnover targets in each period (month, quarter). When different items in a single project have varying billing values, and there is pressure to show turnover in a short period, the focus of procurement and design is invariably on billing  high-value items, even though those items may not be needed immediately. The priority bias often leads to situations where a site has a lot of material for the future but is waiting for matching parts to work uninterrupted in the present.When site execution is interrupted due to missing designs or materials, execution contractors do not assign adequate manpower to each site. At the same time, site managers are forced to open multiple work fronts to ensure good utilisation, and to prevent direct resources from leaving the site. The net impact is slow progress and interruptions on almost every open site module.When projects approach closure and handover, the managerial bandwidth required is very high, as many issues must be resolved. At the same time, the bulk of the project turnover is usually already booked. Consequently, the management’s focus in a ‘turnover obsessed’ company shifts to improving billing from other projects, even as  sites in the final handover stage remain open. Soon, the last 20% receivables start to pile up. In most projects, this 20% is the gross contribution. After a few years, when companies try to close old projects, official handovers become difficult, and write-offs become the only way to exit projects. <figure class="image"><img style="aspect-ratio:4000/3868;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//ec-article-6-img-1-1735541285_1776930548.jpg" width="4000" height="3868"></figure><h2>Design delays: The vicious loop</h2>Expediting requests from many open sites for missing designs and corrections frequently interrupt the design of other projects, which add to the design lead time of every project.Interruptions in design tasks arise not just from sites but also from delays in vendor inputs stemming from conflicts in day-to-day priorities between purchase (order placement) and design departments. Pending information inputs from customers adds to the delays. Hence, design departments are forced to frequently switch either within the project’s modules or across different projects. This adds to the lead time and forces the department to release drawings with assumptions. These drawings ‘flow back’ for corrections, further  interrupting the process. Delays in design and release of parts, coupled with ‘turnover based’ prioritisation of items, leading to desynchronisation in the arrival of items  at the site.  <h2>The hindsight bias ‘solution’</h2>When delays are detected late, but the associated coordination lapses are resolved almost overnight, one tends to conclude, albeit in hindsight, that detailed planning and scheduling of tasks with improved accountability for task milestones across departments will solve coordination problems.However, when an EPC project requires management of a high volume of uniquely procured items and drawings, and each item or drawing requires coordination efforts across multiple departments, and there are many projects in the system, making detailed plans at the item level to drive coordination is laborious. Such plans are also hypersensitive to the slightest uncertainty. At the same time, when resources are shared across projects, delays in one project’s tasks can create a multiplier effect, delaying other project tasks. Hence, all such plans go haywire within a few weeks of execution.  <h2>The way out</h2>Experienced EPC managers acknowledge that the fastest execution occurs when work proceeds uninterrupted. However, they are forced to concede to interruptions. Major sources of interruptions are:  1. Priority conflicts.  2. Flow back of work from downstream departments.  3. Need to wait for information or approvals.These cannot be reduced by scheduling but only by instituting flow control rules.   <h2>Flow control rule 1: Gating and control of WIP levels </h2>Scheduling milestone dates for different agencies cannot help but reduce interruptions and delays in an environment of uncertainties. They only add up to priority conflicts at the operating level and amplify interruptions. Interruptions can be reduced dramatically by having a process that forces work front closures across coordinating departments. Limiting the number of open independent design modules (work-in-progress, or WIP, level), will bring focus on closures. A new design module for any project should not be worked on unless an existing module within the allowed WIP limits meets the closure criterion. This would prevent interruptions and reduce the lead time of every design module.The closure criteria should also be used as a ‘no-start’ gating rule for the subsequent phase of site execution.The WIP control, along with the ‘no-start’ gating rule, forces the synchronisation of design department priorities with those of the purchase department. These rules enable timely finalisation of equipment and scope for purchase order placement, which, in turn, helps in receiving initial equipment vendor inputs well within the required time to complete engineering. At the same time, a strict closure criterion reduces ‘flow backs’. When designs are waiting in the queue to enter the ‘WIP zone, one gets more time to arrange for the required information from customers.While WIP rules in design/engineering enable the alignment of vendor designs with overall engineering, it is also crucial to align equipment supply with the site erection sequence. When equipment manufacturing priority considerations are related to the manufacturer’s billing rate, there is a high chance of receiving parts out of sequence. The way to prevent this is to align manufacturing clearances based on site sequence requirements.  <h2>Flow control rule 2: A common and stable project system</h2>Without detailed item-level scheduling, the uncertain environment of EPC projects requires a common, stable priority system for executing tasks across all departments. Managers should have a common understanding of what is truly urgent and what is not.Implementing strict flow-control rules for gating and WIP controls ensures that most tasks are executed close to their ‘touch time’. In this new environment, tasks can be planned in a fraction of their typical lead time, and a common time buffer pool can be created for the project. This time can be shared by all departments. The rate of buffer usage, along with the project’s progress, can also be used to establish a common, objective priority system.  <h2>Flow control rule 3: Predefined rhythm of Flow management</h2>Since tasks are planned close to their touch times, they are exposed to delays due to uncertainty. Such ‘delays’ should not be attributed to the failure of individuals doing the tasks. This implies that management intervention cannot be postponed to a task-level deadline. The way out is to establish a default ‘rhythm’ for reviewing tasks and projects. At the supervisor level, task management should be done daily to ensure maximum touch time in a day for the task in progress. At higher levels, the ‘rhythm’ of review can be set to weekly or fortnightly.The review can also be restricted to critical areas of the project as defined for the level of management. This form of predefined, proactive intervention, rather than reactive intervention close to deadlines, ensures that issues are identified and tackled early.The rules of Flow management ensure rapid cross-agency information coordination for design integration and coordinated material supply for site integration, resulting in reduced overall lead times in complex project environments for EPC companies.

Key Takeaways

EPC companies are facing pressure on their margins, and execution lead time is the key culprit, stemming from an obsession with turnover targets. However, all is not lost; there is a way out of this quagmire. Using Flow Management of projects can help ensure the timely completion of projects.

EPC reborn, focus on flow

Published: The Economic Times, January 2, 2014 The last few quarters have been tough for most Engineering, Procurement, and Construction (EPC) companies. Advances from new projects are going down, while collections from running projects have been poor. The net effect is increased borrowings with associated interest costs, which are denting  companies’ profitability. On the face of it, it looks like a macroeconomic crisis beyond  companies’ control.However, analysis of operating-level performance of EPC companies shows a high correlation between an ‘internally controlled’ variable – the project execution lead time (and delays), with margin erosions and working capital requirements. When site closures are grossly delayed, the direct cash outflow from missing material and site expenses balloons, and the final part of the receivables linked to site handover is delayed.Regardless of external conditions, EPC companies stand to gain in margin control and receivables management by improving the rate of project closure, or, in other words,  the flow of projects in execution.  <h2>Obstacles to improving flow</h2>Improving flow is not about special expediting efforts on a specific project. It involves acquiring the capability to reduce lead times of all projects as a process. When delays are caused by customer scope changes or hold-ups in approvals and clearances from external agencies, reducing lead times seems impossible. However, hidden behind visible external delays are those caused by internal factors.  <h2>Management by Turnover: The biggest waste</h2>Most EPC companies are obsessed with meeting turnover targets in each period (month, quarter). When different items in a single project have varying billing values, and there is pressure to show turnover in a short period, the focus of procurement and design is invariably on billing  high-value items, even though those items may not be needed immediately. The priority bias often leads to situations where a site has a lot of material for the future but is waiting for matching parts to work uninterrupted in the present.When site execution is interrupted due to missing designs or materials, execution contractors do not assign adequate manpower to each site. At the same time, site managers are forced to open multiple work fronts to ensure good utilisation, and to prevent direct resources from leaving the site. The net impact is slow progress and interruptions on almost every open site module.When projects approach closure and handover, the managerial bandwidth required is very high, as many issues must be resolved. At the same time, the bulk of the project turnover is usually already booked. Consequently, the management’s focus in a ‘turnover obsessed’ company shifts to improving billing from other projects, even as  sites in the final handover stage remain open. Soon, the last 20% receivables start to pile up. In most projects, this 20% is the gross contribution. After a few years, when companies try to close old projects, official handovers become difficult, and write-offs become the only way to exit projects. <figure class="image"><img style="aspect-ratio:3995/3473;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//image_1781342299.png" width="3995" height="3473"></figure><h2>Design delays: The vicious loop</h2>Expediting requests from many open sites for missing designs and corrections frequently interrupt the design of other projects, which add to the design lead time of every project.Interruptions in design tasks arise not just from sites but also from delays in vendor inputs stemming from conflicts in day-to-day priorities between purchase (order placement) and design departments. Pending information inputs from customers adds to the delays. Hence, design departments are forced to frequently switch either within the project’s modules or across different projects. This adds to the lead time and forces the department to release drawings with assumptions. These drawings ‘flow back’ for corrections, further  interrupting the process. Delays in design and release of parts, coupled with ‘turnover based’ prioritisation of items, leading to desynchronisation in the arrival of items  at the site.  <h2>The hindsight bias ‘solution’</h2>When delays are detected late, but the associated coordination lapses are resolved almost overnight, one tends to conclude, albeit in hindsight, that detailed planning and scheduling of tasks with improved accountability for task milestones across departments will solve coordination problems.However, when an EPC project requires management of a high volume of uniquely procured items and drawings, and each item or drawing requires coordination efforts across multiple departments, and there are many projects in the system, making detailed plans at the item level to drive coordination is laborious. Such plans are also hypersensitive to the slightest uncertainty. At the same time, when resources are shared across projects, delays in one project’s tasks can create a multiplier effect, delaying other project tasks. Hence, all such plans go haywire within a few weeks of execution.  <h2>The way out</h2>Experienced EPC managers acknowledge that the fastest execution occurs when work proceeds uninterrupted. However, they are forced to concede to interruptions. Major sources of interruptions are:  1. Priority conflicts.  2. Flow back of work from downstream departments.  3. Need to wait for information or approvals.These cannot be reduced by scheduling but only by instituting flow control rules.   <h2>Flow control rule 1: Gating and control of WIP levels </h2>Scheduling milestone dates for different agencies cannot help but reduce interruptions and delays in an environment of uncertainties. They only add up to priority conflicts at the operating level and amplify interruptions. Interruptions can be reduced dramatically by having a process that forces work front closures across coordinating departments. Limiting the number of open independent design modules (work-in-progress, or WIP, level), will bring focus on closures. A new design module for any project should not be worked on unless an existing module within the allowed WIP limits meets the closure criterion. This would prevent interruptions and reduce the lead time of every design module.The closure criteria should also be used as a ‘no-start’ gating rule for the subsequent phase of site execution.The WIP control, along with the ‘no-start’ gating rule, forces the synchronisation of design department priorities with those of the purchase department. These rules enable timely finalisation of equipment and scope for purchase order placement, which, in turn, helps in receiving initial equipment vendor inputs well within the required time to complete engineering. At the same time, a strict closure criterion reduces ‘flow backs’. When designs are waiting in the queue to enter the ‘WIP zone, one gets more time to arrange for the required information from customers.While WIP rules in design/engineering enable the alignment of vendor designs with overall engineering, it is also crucial to align equipment supply with the site erection sequence. When equipment manufacturing priority considerations are related to the manufacturer’s billing rate, there is a high chance of receiving parts out of sequence. The way to prevent this is to align manufacturing clearances based on site sequence requirements.  <h2>Flow control rule 2: A common and stable project system</h2>Without detailed item-level scheduling, the uncertain environment of EPC projects requires a common, stable priority system for executing tasks across all departments. Managers should have a common understanding of what is truly urgent and what is not.Implementing strict flow-control rules for gating and WIP controls ensures that most tasks are executed close to their ‘touch time’. In this new environment, tasks can be planned in a fraction of their typical lead time, and a common time buffer pool can be created for the project. This time can be shared by all departments. The rate of buffer usage, along with the project’s progress, can also be used to establish a common, objective priority system.  <h2>Flow control rule 3: Predefined rhythm of Flow management</h2>Since tasks are planned close to their touch times, they are exposed to delays due to uncertainty. Such ‘delays’ should not be attributed to the failure of individuals doing the tasks. This implies that management intervention cannot be postponed to a task-level deadline. The way out is to establish a default ‘rhythm’ for reviewing tasks and projects. At the supervisor level, task management should be done daily to ensure maximum touch time in a day for the task in progress. At higher levels, the ‘rhythm’ of review can be set to weekly or fortnightly.The review can also be restricted to critical areas of the project as defined for the level of management. This form of predefined, proactive intervention, rather than reactive intervention close to deadlines, ensures that issues are identified and tackled early.The rules of Flow management ensure rapid cross-agency information coordination for design integration and coordinated material supply for site integration, resulting in reduced overall lead times in complex project environments for EPC companies.

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Standard project scheduling fails under uncertainty. Discover the 3 flow-control rules that reduce EPC project lead times and unlock trapped receivables.