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FEED is King

FEED takes over EPC as Business King

Projects front end engineering and design (FEED) is taking the King’s role over engineering, procurement and construction (EPC). FEED is King.

This statement comes from barre graph below. It represents the capital expenditure (Capex) awarded in EPC contracts year per year.

We can see how the amount of Capex awarded on early days of 2021 is already very close to the entire year 2020.

In fact, the EPC contracts appearing as awarded in 2021 were sanctioned in 2020 for execution in 2021. It reflects how the End Users are adopting a new business model.

In 2020, End Users converted the FEED contracts into EPC contracts without any tender. This new practice represents 50% of the cases.

To do so, the End Users and the incumbent engineering company made all the decisions during the FEED phase to close an EPC deal.

That is how FEED is taking the key role over EPC.

For End Users, FEED becomes the Key of Savings

Today, for most of the End users, FEED is King as it provides the projects with the most significant savings.

In the past, the Operators used to consider the FEED as nearly a waste of time and money.

First, because the company performing the FEED was not necessary committed as the EPC work was not in its scope. Second, because the nominated EPC contractor was complaining about the FEED all along to justify claims and change orders at extra costs.

But things have changed.

The operators are no longer expecting  5% or 10% reduction on project cost as they used to do it in tendering an EPC contract.

Now, they are targeting 30% to 50% savings on project cost.

An EPC contract tender cannot reach such levels , it is too late.

Only FEED work in thinking out of the box and integrating new solutions can do it.

Engineering Companies choose FEED as King

So far, we used to nickname the engineering companies and contractors as “EPCs” by reference to their main core business.

But since 2014, more and more engineering companies run away from the EPC competition to focus on FEED.

In 2020, companies like Fluor, KBR, Saipem or Technip Energies announced not to run after EPC contracts competition anymore. They will focus on FEED contracts in expecting to convert them into EPC contracts without any tender.

In parallel, the floating, production, storage and offloading (FPSO) vessels builders adopted the same strategy.

In the past, these engineering companies were refraining to perform the FEED in order to stand free to bid for the EPC contract.

But things have changed for them too.

On one side, the demand soared for comprehensive FEED exploring all solutions. On the other side the emergence of Asia contractors intensified the competition on EPC tenders.

In 2020, this new context offered a fantastic opportunity to the engineering companies to pivot in the same direction as End Users

Vendors and Sub-Contractors must go FEED

As a consequence, FEED is King for vendors and sub-contractors too.

Not only because all decisions are made at FEED stage, but also as it impacts the vendors and sub-contractors pricing model.

Usually, the vendors and sub-contractors submit budgetary offer at FEED stage. Then, they go more aggressively until their rock-bottom price when the EPC contract is awarded.

Unfortunately, this approach does not work in the new business model as it eliminates corresponding suppliers at first round.

In fact, the engineering company cannot reach an attractive price for its own customer with only vendors budgetary offers. It needs more realistic prices.

Therefore, the vendors and sub-contractors must adopt another pricing model.

In this new context, we recommend to use the so-called open-book pricing as illustrated below.

This open-book pricing model allows vendors and sub-contractors to submit more aggressive prices at FEED stage while preserving their margins until orders.

Of course, the vendors and sub-contractors must identify the context of each project to decide on the right pricing strategy.

The companies unable to make the difference between the conventional and new business model are at risks to disappear as they will not be short-listed anymore.

To identify the context of each project and adopt the right pricing strategy, you can find all information in www.projectsmartexplorer.com

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