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The era of Chinese EPCs in Africa

Chinese Engineering, Procurement and Construction (EPC) contractors have definitively arrived on the global contracting market. They will have an extensive impact on the delivery of projects worldwide, and their influence will be particularly strong in Africa.

by Adam Boughton

Regional Director – EMEA Sectors

08 September 2017
Transnet New Pipeline

The way forward

Chinese Engineering, Procurement and Construction (EPC) contractors have definitively arrived on the global contracting market. They will have an extensive impact on the delivery of projects worldwide, and their influence will be particularly strong in Africa.

It is well known that Chinese companies are highly capable and can excel at almost anything. The One Belt One Road project intersects with East Africa, increasing Chinese financial influence, and Chinese EPC delivery companies are playing a significant part in the building of a new Africa. In this environment, there is much to be gained by reflecting on project-delivery strategies that can help government and the private sector achieve the best outcome when delivering projects with Chinese EPC contractors. 

As they become increasingly vital to African development, Chinese EPC contractors are building a growing portfolio of work in the region. When working with Chinese EPC contractors, taking an insightful, strategic approach improves the odds of success for all stakeholders. The methods that owner companies use to select and manage these contractors are incredibly important. 

Roughly 30% of projects under US$1 billion fail to achieve the desired outcomes, and the rate rises to 50% for projects over US$1 billion. This applies regardless of the country in which a project is constructed and the culture of the EPC involved or its country of origin1. Failure rates can be even higher in emerging markets and remote locations like those found in Africa, where numerous risk factors, if not properly addressed, can combine to build a “perfect storm” that derails a project. To minimise the possibility of failure, and to improve expected outcomes, owner companies working with Chinese EPCs in Africa are well advised to follow 12 key guidelines, which we share and explain below. 

There are numerous advantages to using Chinese EPC contractors. Not only can they deliver cost savings, but they can also add value to other areas of a project. However, unlocking such savings and value while minimising risk is only possible when owners assign additional project-management, construction-management,and quality-assurance and -control resources to their projects.

It is also important to recognise that while the overall cost of using a Chinese EPC contractor tends to be lower initially, the magnitude of the saving is often less than estimated because additional costs can be incurred during project execution and whole of life operations. 

The following guidelines have been developed in response to first-hand experience of project managing and working with Chinese EPC contractors in Africa. While each one does not apply to all contracting companies, as they have different levels of capability, they all indicate areas where project outcomes can be optimised by taking action in a project’s early stages. Following those guidelines that prove relevant to a particular project and EPC contractor can bring greater success for the client and contractor by improving risk management.

12 guidelines for successfully engaging a Chinese EPC

1. Develop a management framework at the initial outset of the project to ensure key strategic issues are addressed through all phases of the project.

Projects involving Chinese EPC contractors must establish a framework at the project kick-off to make sure all key strategic issues are highlighted and that they can be addressed as part of the Project Execution Plan. In particular, the framework will capture opportunities and risks, and will provide sufficient time to adopt and develop a strategy based on the specific circumstances of the project, and must be in place prior to award of the EPC contract.

Important issues include: 

  • Providing information on the governmental commitments and stakeholder engagements that have to be met as part of the project execution 
  • Regulatory and organisational structure 
  • Appropriateness of front—end engineering and contract modelling (strong consideration of key performance indicators is critical) 
  • Environmental and social impact and sustainability management 
  • Health and safety 
  • Local content 
  • Schedule development, reporting and progress measurement requirements, preferred vendor and subcontractor lists, standards and specifications against which work must be delivered 
  • Cash-flow and money management protocols 
  • The need for early preparatory work 
  • Compulsory requirements regarding design criteria and specifications 
  • The need for an independent review engineer 

2. Chinese EPC contractors, and a project’s surrounding community, can significantly benefit from strong health and safety policies and procedures. EPC contractors must embed a greater health and safety focus in their organisational culture, at least in the context of the project.

Any project must have outstanding safety performance and an incident-free record to be a success. All injuries, illnesses, accidents and environmental incidents are preventable. Comprehensive systems for managing health, safety and environment (HSE) and security need to be established and implemented on the project to achieve this goal. 

A health, safety and environment (HSE) plan needs to be developed for the environment and risk profile of each specific project. Particular attention should be given to the following areas, where Chinese EPC contractors benefit most from advice and support: 

  • Making health, safety and environmental protection a personal value that guides behaviour, actions and decisions 
  • Meeting legal and moral obligations to keep people safe and protect the environment and community 
  • Managing risk during construction, commissioning and operations 
  • Selecting, training and assessing competency of managers, supervisors, HSE personnel and all other personnel 
  • Facilitating consultation, including internal HSE communications, field HSE meetings and toolbox sessions 
  • Managing documents and records 
  • Field execution, including of site-specific HSE management plans, travel arrangements, fitness for work and commissioning strategies 
  • Change management 
  • Preparing for and responding to crises and emergencies 
  • Analysing incidents and behaviour, including in the areas of medical services, occupational health and hygiene, and rehabilitation 

3. Conducting design reviews and production-line quality inspections in China before delivery can significantly improve an asset’s whole-of-life effectiveness.

A procurement quality support hub based in China can provide African customers with excellent solutions that deliver gains in the areas of cost, schedule and quality. Management oversight should cover the entire supply chain, beginning with strategic advice on which materials to source from China and proceeding to procurement, inspection, expediting, warehousing, export shipment and related logistics. In Africa, mobilising quality-inspection capability from offices close to any Chinese manufacturing environments involved in a project can minimise turnover times, decrease notification requirements and reduce travel and accommodation costs.

The increased concerns associated with Chinese procurement are typically more than offset by significant capital-cost savings. Experience has shown that it is prudent to reinvest some of those savings into managing and mitigating the risks, capturing further benefit for the project.

It is extremely beneficial to develop a strategy for managing the risks involved in procurement, based on a rigorous and structured process. This ensures that focus is maintained on capturing and recording information needed to resolve issues related to schedule, quality and cost.

Each procurement event is unique, and while general principles may be applied, it is essential to identify, quantify and manage the particular risks associated with individual procurements. It is important to consider the possibility of co-locating engineers in contractor offices to assist with on-the-job design reviews, procurement and manufacturing processes approvals, and quality interventions.

African workers on rail track

Inclusion of local content requires an experienced interface between Chinese contractors and local workers to reconcile different expectations in the areas of culture, language, behaviour and professional conduct.

4. The establishment of front-end engineering and contract modelling is critical to ensure that key project details are fully established before the contract is awarded.

Determining the correct contract modelling and definition, and the preparation of contract documentation for the EPC engagement, can be crucial to a project’s success. Failure to formulate the contract correctly can cause misalignment of the asset’s construction design, execution and operational needs, which are all critical.

Advisory activities that support formulation of the contract can include the following:

  • Assessment of the contracting and contract-engagement model
  • Establishment of quality and performance requirements
  • Establishment of the strategy for project delivery and an associated, detailed schedule
  • Establishment of requirements to be met in supporting construction activities in areas such as safety, mobilisation, camp requirements and standards, social interfaces, regulatory compliance, reporting, quality, warranties and contract compliance management
  • Procurement establishment and appointments
  • Whole-of-life cost planning and analysis, integrated with design
  • Establishment of stakeholder relationships

5. Chinese EPC contractors benefit from support in developing a project-execution plan and working in accordance with its requirements.

A Project Execution Plan (PEP) and associated project plans (quality; health, safety and environment, etc.) should be developed for the execution component of the project, based on proven methods and techniques.

Such a plan should detail responsibilities and implementation strategies for all tasks that need to be performed to deliver the project. It becomes a valuable tool to assist in project execution that is completed and delivered according to the baseline schedule and within the budget.

Chinese EPC contractors may not be familiar with this way of working to a defined PEP, so such a plan must be requested in the engagement contract and then the contractor will need to be supported in working to it.

6. Establishing a sound approach to project logistics is critical to the project’s success.

The logistics capabilities of Chinese firms are generally exceptional, as their country has been refining the export of goods for decades. Nevertheless, when working with Chinese EPC contractors, a considered approach to establishing logistics and office services, such as communications based on the work methodology and actual conditions on the ground in Africa, becomes another critical success factor.

The establishment of a sound approach to logistics and work methodology is important to successfully working in remote locations and managing large numbers of deliveries. The infrastructure to be provided on-site, and how best to arrange it, must be planned to support the proposed methodology for the project.

Chinese workers discussing problem

Establishing a project steering committee can significantly improve communication between the client and the Chinese EPC contractor organisation.

7. The capabilities of Chinese EPC contractors need to be supplemented with environmental-management capabilities and an appreciation of requirements within specific African countries.

Chinese EPC contractors need significant support in the management of environmental risks to ensure sustainable development and good stakeholder relations. Effective environmental management reflects responsible business practices that meet the expectations of the global marketplace, and environmental programs must be designed in a way that ensures integration of environmental goals and due diligence with a company’s overall management system. This improves environmental performance and helps manage risk.

Project teams have to establish life-cycle environmental solutions in areas including conducting environmental feasibility and baseline studies, negotiating environmental authorisation processes, and mitigation and management planning. It is particularly important to seek support with environmental-compliance monitoring in line with local and regional legal frameworks, as well as with International Finance Corporation (IFC) and World Bank requirements.

The integration of environmental considerations with engineering solutions reduces the impacts of projects from the planning stage, optimising environmental and economic performance, and reducing project risks and liabilities. With assistance in the adoption of appropriate project-delivery capability, support systems and processes, project owners employing Chinese EPC contractors can achieve timely delivery of a technically complex program of environmental, social and health impact assessment (ESHIA) studies.

8. The management style of the client must be adapted to match the diverse cultures involved in the project.

The right leadership style is vital in working with Chinese EPC contractors. To build confidence and trust with the client and the EPC simultaneously, management must be professional, fair and proactive, and provide timely resolutions to issues.

Therefore, an understanding of China’s culture, hierarchical organisation structures and approaches to problem solving is essential. The management team should provide guidance, mentoring and structured oversight that helps build the relationship between the owner and the EPC contractor and supports the project objectives.

9. Because Chinese EPC contractors often prefer to introduce Chinese design and construction standards, they may need support in adopting and following standards proven, used, and even required in regions such as South Africa, the United States, Australia and Europe. Use of these internationally recognised standards can improve project outcomes.

The construction standards adopted for a project can have a significant effect on capital and future maintenance costs. Adopting the wrong standards and construction methods at the outset can significantly increase a project’s whole-of-life cost (total cost of ownership).

If Chinese standards are to be used, it is important to assess the possible effects on project delivery outputs and operational costs.

It can be greatly to a client’s advantage to conduct an independent design review to check designs produced by contractors and vendors, as well as to establish an approval process for materials to be used in the construction of the project. This review must start early in the construction phase to ensure correct standards are incorporated into the contract’s technical documentation.

10. Adequate management and supervision of construction is required to ensure smooth, timely completion, as well as quality and compliance to design.

Chinese EPC contractors reach their best performance potential under skilful management and supervision. Contractual obligations should be enforced so the contractor has the greatest possible opportunity to meet or exceed their performance targets.

Inclusion of local content requires an experienced interface between Chinese contractors and local workers to reconcile different expectations in the areas of culture, language, behaviour and professional conduct. The EPC contractor and management team have to work together to meet overall project objectives and resolve non-conformances before they evolve into adversarial situations.

It is also important to ensure that Chinese site-management and supervisory personnel are given the proper mandate, in line with their roles and responsibilities, to make decisions on-site. This prevents delays in waiting for the authority to proceed in a certain manner, and allows change to be managed effectively as it arises on-site.

11. Establishing a project steering committee can significantly improve communication between the client and decision-makers in the Chinese EPC contractor’s organisation.

A steering committee made up of senior management, senior technical advisory staff and the EPC contractor’s senior management team provides a level of support that ensures the project and client receive the required corporate attention and have a mechanism for giving feedback. This can help to overcome the issue that in Chinese organisations, lower-level managers are not always empowered to make decisions or may be reluctant to do so, necessitating contact with senior management to resolve issues or expedite progress.

12. To ensure the continued operational success of the asset, a construction closure, commissioning and operational handover review should be established, in which outcomes should be compared with the project-execution plan.

Once complete, a project should be handed over to operations in a state of design compliance that is fit for purpose. The works should have reached a level of completion defined in the contract. A comparison of the engineering work with the breakdown structure from the PEP, and with the interface-management planning process, should confirm that all items have been addressed and that the proposed technical packages are complete.

 
1 According to Ed Merrow, the founder and chairman of International Project Analysis, and Bent Flyvbjerg, a professor of program management at Oxford University, failure is defined as >25% overspend, >25% schedule slippage, or severe and continuing operational issues after two years of operation  

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