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Outsourcing T&D Infrastructure Projects ABB

Tim Hope ABB Inc., Robert M. Reymers - ABB Inc.
Abstract-- This paper addresses outsourcing from a contractor
perspective that is tempered by the extensive utility experience of the lead author. Because the scarcity of in-house resources is most often the driver for outsourcing, the paper stresses the need to establish a target based on the minimum number of in-house resources available and then deploy an outsourcing approach that is consistent with that value. This effort needs to include the effort required to manage the outsourced portion of the work. The successful execution of an outsourced project and the ability to meet the resource target lie in minimizing the uncertainty surrounding the contractors work scope. Since outsourced work will generally be awarded on a fixed price basis, it is critical that the contractor and the utility tightly define the scope of the effort and then aggressively manage to it. Although the paper identifies means of specifying, awarding and executing an outsourced project, investments in the initial request for proposal development effort will be most cost effective. Index Terms-- Power system economics, power system planning, power system reliability, substations, outsourcing.

When developing this number, each utility should keep in mind that there are two aspects of executing every outsourced project: 1. The management and execution of the utilitys scope items. The management of the contractors scope items.

2.

It is somewhat obvious that both of these efforts need to be accurately identified and man-loaded because it will be difficult to increase the in-house manpower commitment above the defined goal after the project starts. Of the two, however, the latter is usually the one that is underestimated. Because the utility Project Manager is often not only the utilitys single point of contact for the project, he may also be the utilitys sole project participant, it is extremely important that the outsourced work is specified, awarded and executed so that it can be managed by the in-house resources available and that the risk of this number increasing during the course of the project is reduced to an absolute minimum. This paper will attempt to address the issues that can dramatically impact the success of the outsourced portion of the project. They will be discussed as they occur during the course of a project, i.e., during the request for proposal (RFP) development phase, the proposal evaluation phase and the project execution phase. III. IMPROVING OUTSOURCING BY AND REDUCING RISK MINIMIZING UNCERTAINTY

I. INTRODUCTION This paper will address outsourcing issues from the perspective of an individual who has over 28 years of experience in project management (either as a Project Manager or as a Director) on both the contractor side and the utility side of this issue. This experience comes from a number of different outsourced project types: consulting engineering analysis and design work, operations projects, construction projects, and engineer-procure-construct (EPC) projects. The paper will focus on the areas that require attention by both the contractor and the utility to ensure that the outsourced project meets both parties objectives. Although utilities and contractors both utilize secunded employees for work that is difficult to assign as a task, this paper will limit itself to issues related to the outsourcing of engineering, procurement and/or construction infrastructure work on a project basis only. II. DEVELOPING GOAL
THE

PROJECT OUTSOURCING MANPOWER

Since the fundamental reason for project outsourcing is the limitations that exist on in-house resources, an important step in outsourcing a project is identifying the minimum number of in-house resources that will be available to execute the project.

One of the recurrent themes in improving the success of the outsourcing process is minimizing uncertainty. Uncertainty exists whenever there are portions of a project that are unknown or are difficult or impossible for a contractor to estimate. Since these costs are either not fixed or are unknown, but the project will be bid and awarded on a fixed price basis, this uncertainty increases contractor risk. These risks are passed along to the utility in one of four ways: 1. 2. 3. 4. As contingencies added to the contractors initial bid price, As aggressive scope management by the contractor to recover these costs following contract award, As quality or cost cutting by the contractor to reduce other project costs or As risks that are retained by the contractor in the form of profit margin erosion

T. Hope and R. M. Reymers are with ABB Inc., Raleigh, NC 27606 USA (e-mail tim.hope @us.abb.com and robert.m.reymers@us.abb.com).

None of these options is compatible with a successfully executed outsourced project. Should the contractor select approach number one above, the project will cost more than it needs to. Should the contractor select approach number four above, it will impact his pricing and/or performance on subsequent projects. Should the contractor elect to deal with the risk via approaches two or three above, the increased time needed to manage the contractor will quickly render the project outsourcing manpower goal unachievable. Clearly, the best way to avoid any potential problems is by minimizing uncertainty. The one portion of the project execution effort that has the most dramatic impact on uncertainty is the RFP stage. IV. IMPROVING OUTSOURCING DURING RFP DEVELOPMENT Issues that can minimize uncertainty and impact the success of an outsourced project can arise in the technical specifications, in the commercial specifications and in the instructions to bidders that make up a typical RFP. A. Technical Specification Uncertainty can be reduced in the technical specifications in the RFP including the nature of the specification, the specific standards to be deployed and the scope boundaries on the project to be outsourced. 1) Types of Specification: There are two types of specifications, functional and detailed. A functional specification sets out the design bases developed for the project by the utility. A functional specification can be as brief as a site plan, a conceptual single line drawing, a list of applicable standards and a project schedule. A site plan should note the site boundaries and the location and orientation of incoming and outgoing lines. A conceptual single line drawing should identify each of the incoming and outgoing lines, voltages, bus configurations and power ratings. The specification will also identify the standards that must be deployed in implementing the design, but the details of the design are left to each bidder. The specification must also include scheduled start and completion dates. In the functional specification approach, the successful bidder is responsible to the utility for meeting the utilitys design basis for the project. A detailed specification sets out a detailed single line and layout drawing developed by the utility, or by an owner engineer hired by the utility. In this approach, the successful bidder is responsible for executing the design specified by the utility. Both approaches are used successfully by utilities as part of outsourcing strategies. The functional approach has a lower up front cost to the utility since the bidders are investing the cost of developing the detailed single lines and layouts. The detailed design specification features shorter bid times and lower bidder development costs. Arguably, the functional specification approach can reduce utility risk in that the

burden of ensuring that the final design meets the utility functional requirements and the detailed design they have developed rests 100% with the contractor, not the utility. 2) Technical Standards: One key source of uncertainty on a project can be the standards to be deployed in designing and constructing it. It is critical that the contract be very specific about what those standards are and, to the extent that they are utility standards, that the standards are well documented, up to date and made available for bidder inspection. If bidders are participating that are not used to performing projects for the utility, the utility may want to highlight standards that, because of geographic or other considerations, are a departure from standard industry practice. Even though the contractor will take the liability if an incorrect standard is used, the project may be delayed. Additionally, if the project is to be conducted on an existing site, uncertainty will be reduced to the extent that the utility can make accurate as-built drawings and any information about underground obstacles available to the bidders. 3) Scope Boundaries Scope selection is another possible point of uncertainty. To attract interested bidders, the scope should be the largest integral project possible and it should be as simple as possible, e.g. everything inside the fence accept The ability to secure permits that are politically sensitive or subject to public hearings will be a major source of risk for a contractor. A utility should consider procuring them themselves well before the project is bid. Those that can not be should be dealt with directly by the utility and the liability borne by the utility. All construction related permits should be borne by the contractor to reduce work load on utility employees as much as possible. Scope boundaries should be selected at the simplest points. Usually this is at dead end structures and/or the cable termination structures. Major equipment procurement risks exist and should be addressed carefully. Utilities may be able to save money by providing selected major equipment, typically transformers, themselves. This is due to long term blanket contracts they may have or just the desire to reduce contractor markup. In these cases, care should be taken to ensure that the internal costs of managing design, procurement and construction interface issues and the diversion of scarce internal personnel resources are factored into a utilitys decision. Soil conditions, especially for large, complex projects, can be a major potential source of uncertainty. It may be cost effective (and reduce pre-contract award site activity) for the utility to perform a nominal amount of soil boring work to minimize bid exceptions and reduce contractor risk. Other project technical interfaces should be minimized wherever possible since all will need to be aggressively managed by utility personnel resources and increase the utilities cost of managing the project. Those that remain, be

they engineering, procurement, construction and/or commissioning, must be clearly defined to reduce any possible misunderstandings and uncertainties. Project completion should be measurable and consistent with the scope. For example, substantial completion will typically occur when a substation is ready to be energized and will not include initial energization if the incoming line is being furnished by the utility or another contractor. Final completion and contract close-out will occur when all punch list items have been completed and when it has been verified that all vendors and subcontractors have been paid by the contractor.

The evaluation process for a functional specification should focus on identifying the most optimal approach from a cost (both internal and external), schedule and design standpoint. Price, specification compliance and bidder qualification (if not pre-qualified) will be the major elements of a detailed specification bid evaluation where opportunities for creativity are limited. In each case, however, point systems can be used to also include intangibles such as corporate and (for larger projects) project team experience. Short lists and interviews are also helpful in finalizing utility perceptions about the strengths and weaknesses of each of the bidders. VI. IMPROVING OUTSOURCING DURING PROJECT EXECUTION Opportunities for improving outsourcing during project execution begin at project kickoff with a thorough understanding of the make up of the project team (including the utility and contractor project team members) and the roles and responsibilities of each member. It is especially critical for the utility Project Manager to establish the interface and communication paths on the project for engineering, procurement and site issues. Successfully run projects are usually run as a joint team effort with the contractor and the utility utilizing the same scheduling software (such as Primavera) and integrated project schedules. Both contractor and utility must aggressively manage key front end elements of the project: engineering deliverable reviews, procurement and permitting activities. Relative to the former, all the utility stakeholders involved in the project (engineering, operations, maintenance) should have an opportunity to review the deliverables with the utility Project Manager taking the role of ensuring that a consolidated set of actionable comments are provided in a timely manner. Any utility procurement activities must be aggressively managed, and allowances should have been made to witness factory testing of key components and for lay down areas upon delivery. Utilities should ensure that each contractor will have a Site Manager with responsibility for all contractor safety and quality management and who has the authority to resolve all site issues.

B. Commercial Specification Relative to commercial issues, incentive schemes and reasonable liquidated damages provide a strong incentive to complete the job properly as long as they are tied to activities in the contractors control. Contractors should be encouraged to develop project cash flows that are based on measurable and achievable milestones. Cash flows that are cash flow neutral will cost the contractor (and the utility) less and should be expected. Finally, the utility contracts group should be made part of the evaluation team and be open-minded when contractors suggest cost effective compromises with regard to terms and conditions. C. Instructions to Bidders The Instructions to Bidders portion of the RFPs also contain opportunities to cost effectively optimize the contractor selection process and therefore improve outsourcing. A bidder pre-qualification effort performed prior to RFP issuance can prove to be very cost effective, especially for public utilities that will have to delay a project award and expend considerable effort to disqualify a low bid from a firm not qualified to perform a particular work scope. Sufficient time should be provided to enable bid preparation, typically 68 weeks for a functional specification and 4-6 weeks for a detailed specification. If the utility already has a bid from a firm they want to do business with and they want a check bid to confirm that the price is competitive, it is probably more helpful to indicate that to the other contractors rather than request a bid in an unrealistically short period of time. It is also helpful to provide the utilitys evaluation criteria. In this way, each contractor can ensure that the right amount of attention and detail is included in responding to each part of the bid. This helps to ensure that the utility doesnt end up with the second best company because it guessed right and the best company guessed wrong. Pre-bid meetings and job walks are a good way to ensure a level playing field when familiarizing the bidders with the scope of work. They should be mandatory for brown field or retrofit projects. V. IMPROVING EVALUATION OUTSOURCING DURING PROPOSAL

VII. RECOMMENDATIONS As some of the speakers here will attest, a team attitude is a critical element of a successfully outsourced T&D project. Each project will have its unique challenges and it will include opportunities for improvement. Each project should be concluded with a lessons learned meeting that includes all the key project team members (including the contractor as well as the utility personnel) so that as outsourcing needs increase, the utility and contractor team members continue to find ways of making future infrastructure projects more and more cost effective. . VIII. BIOGRAPHIES

4 Tim Hope received his Bachelor of Mechanical Engineering Technology degree from the University of North Carolina at Charlotte in 1977. As the Director of Construction for a large Southeastern investor owned utility, Mr. Hope has been involved in all elements of project outsourcing including new infrastructure, upgrades and modifications. Mr. Hope is currently the Vice President of Operations for ABB Inc. in Raleigh, North Carolina, where he oversees all project engineering, procurement and/or construction activities.

Robert M. Reymers (M1967) received his Bachelor of Science and Masters of Science Degrees in Electrical Engineering from Brown University in Providence, Rhode Island. He has extensive experience in strategic planning and management consulting and on power systems analysis and control and protection system design. Mr. Reymers is currently a Senior Account Manager for ABB Inc. in Raleigh, North Carolina where he develops large substation and service projects for selected customers.