EPC (Engineering, Procurement, and Construction) companies are responsible for designing and constructing some of the most complex bridges, buildings, energy grids, power plants, etc – in the world. Whether it is offshore, at high altitude or on uncertain terrains like sand, EPCs are a different breed of problem solver and continue to push the boundary when developing new structures. However, as the complexity of these builds increase, so to does the operation and maintenance of them. This is leading EPCs to expand their offering with the additions of ‘O’ (Operate) and ‘M’ (Maintain). So how has this transition to operation and maintenance provider impacted the industry?
Extinction or Evolution?
EPC companies are a vital part of the World economy, according to Statistia, in the US they’re responsible for 4.3% of the nation’s GDP a year and in a report by McKinsey it was noted that to keep up with the rates of global GDP growth, about $57 trillion in infrastructure spending is required by 2030 to ensure the EPC industry is able to maintain itself. The stark reality is that EPCs employ hundreds of thousands of workers, continue to develop economies and improve connectivity. So why are EPCs always under scrutiny?
With only 1 out of 4 EPC projects being delivered within 10% of the original deadline and only 31% of projects being delivered within 10% of the budget given – a clear picture starts to emerge when you look at EPC project performance. Whilst EPC companies themselves are quick to point blame in low labor rates/productivity, a lack of collaboration between contractors or overstretched deadlines it is hard to ignore that, 30% of the work performed by EPCs is actually rework that happened in previous projects, which would suggest the work itself was not up to standard or that designs were not accurately mapped out.
So is it time for the existing EPC model to go extinct or evolve?
EPCM – A step to success
The one thing we can all likely agree on is that the EPCs are a critical part of the World economy. Hence, suggesting that they simply go extinct wouldn’t be the smartest route. However, they can’t continue to operate as they are today. Projects are going over budget, not being completed on time and needing constant rework due to quality and design.
EPCs will therefore have to evolve, and some earlier pioneers are already on this journey. The first and logical step for EPCs to take is to offer service and maintenance contractors for what they construct. The rationale behind this is that over the past 20 years there have been only a 1% increase in the overall productivity of EPCs – with profit margins being around 4% there hasn’t been the scope to invest in operations to improve efficiency.
Offering service and maintenance contracts on what they build has the potential to increase lifetime revenues on a project by 120-200%, this increase in revenue will allow EPCMs to actively invest in technology, people and equipment to increase productivity and further improve profit margins. Service and maintenance contracts also double down on the incentivizing EPCMs to ensure projects are completed on time. Since, this is the only way they will then start to earn that revenue stream. And finally it encourages completing projects at a high quality. This will reduce the amount of maintenance and further increase the profitability of the service and maintenance contracts.
It is key to note that to successfully provide service and maintenance contracts you’ll need a business system that contains specific functionality. The advantage is that IFS Cloud can help you significantly simplify your business system architecture by combining best-of-breed industry specific functionality and service and maintenance processes all from one platform – not only does this ensure you work from one source of truth, but it allows you to accurately monitor a project over its complete lifespan.
EPCOM – The Future is Servitization
While the addition of service and maintenance contracts will certainly help remedy a number of the industry challenges. Those that are really looking to be pioneers will need to go that step further and offer operation services. This may seem like a daunting prospect but in reality could be a simple transition.
For example, imagine you’re a specialist in power plant construction, is it unrealistic to assemble a team who can operate that plant as a service? In the big picture, EPCOMs are the future as they can offer a complete end-to-end service. This provides a complete solution for the asset owner which could be private or a government contract. In the above example, the idea is that you are no longer just selling a power plant you are selling energy. You’re powering people’s homes, charging their vehicles and empowering individuals.
The evolving complexities of EPCs
As an EPC whatever journey you’re on, the industry must change. Why the complexity doesn’t show signs of going away, a business system like IFS Cloud can reduce it and support your path to success. To find out more speak to one of our industry experts today.
Do you have questions or comments?
We’d love to hear them so please leave us a message below.