True Costs of Outsourced Engineering
Updated: Mar 8, 2018
What is the difference between the image on the left and the one on the right?
The size of the connecting endplates!
The one on the right has a connection plate carrying a 2 meter cantilevered canopy subject to snow loadings, shear forces and bending moments and the one on the left is twice as big but only carry's about 1/20th of the load!
What is the cause of this discrepancy? The smaller plate has been designed by experienced engineers and the other has been designed using a low cost outsourced centre
The purpose of this post is not to highlight a difference in capabilities but rather to raise a very basic question.
WHICH ONE ARE YOU GETTING BETTER VALUE FROM?
On small scale projects, where the engineering is easily managed by a handful of experienced engineers, outsourcing the work to a "low cost" centres may be the most economical option. But on larger projects the ultimate saving becomes highly questionable. Here standard details are applied on a mega scale, so when items are over engineered it quickly adds up to millions of dollars’ worth of unnecessary overspend.
I typically come across a litany of over-designed components that cause project costs to sky rocket. It's not the intention of this post to dig into the weeds and extract all the examples but rather to discuss the PREVALENT PROBLEM with the way engineering projects are being executed. That is...
THERE IS TOO MUCH FOCUS BEING PLACED ON THE FRONT END ENGINEERING COSTS.
There is a perception that cutting down on the upfront engineering results in a lower cost project. I strongly believe that the truth is quite the opposite!
One of the main reasons low cost centres are used is that there is enormous pressure placed on EPC firms to submit a competitive bid. It’s unlikely that they will win ANY job at all unless they submit engineering fees with a huge workshare component.
In the end the Client pays the price in the downstream cost of construction and execution. But this is only discovered once the project is well underway and it’s too late to change direction.
Outsourced engineering certainly has it place. However, in 15 years I have yet to see true added value once the percentage work share goes beyond 40-50%. This may not be the politically correct answer, but that is not what I am interested in.
The only thing that matters is providing best value for the client.
I believe this is exactly where the problem lies… with the Clients! In their endeavour to get final investment decision they push engineering firms to provide highly competitive bids. And hungry EPC firms push outsourcing as high as 90-100% in order to win jobs and sustain work.
Outsourcing has merit if these “High Value Centres” or “Centres of Excellence” as they are called have the expertise and experience to cope with these projects. However most times these centres are filled with young ladies and gentlemen between 20 and 25 years of age with nowhere near enough experience to deal with the complexities of mega projects.
There is little wonder why a report by Ernst & Young found that industry wide performance on oil and gas megaprojects almost never deliver projects on time.
It showed that only 36% of projects were on budget and 73% went over schedule.
It’s time for executives within production companies to recognise that if they want excellent operating facilities, cutting costs when it comes to engineering is an exceedingly good way to stumble at the first hurdle.