by Stephen Greer, P.E.
It is an open secret among many engineers and project management professionals that procurement is not considered an important use of valuable time. This unfortunate prevailing attitude contributes to the notion that the purchase of capital equipment in the process industries is merely a single, easy step in the vast journey of project decisions and not a comprehensive, serious system requiring thoughtful, hard work.
The pattern of not prioritizing procurement within a project and having to deal with downstream consequences of missed schedule milestones, poorly specified equipment, and poor vendor relationships gets repeated again and again. These problems can doom a project to delays and budget overruns.
When used correctly, however, procurement is a potent tool in project management to ensure against these costly and sometimes fatal problems. A comprehensive review of capital equipment purchasing practices can provide the project engineer with the basic knowledge required to execute procurement effectively in a rigorous and systematic process. The process can be broken down into steps, and the concepts apply to end-use companies as well as engineering and construction companies large and small.
There are many good practices covering the acquisition of capital equipment, and in the early stages the most important are about communication. If a vendor is asked to bid for the purchase of capital equipment, needs should be stated very clearly. The first step in doing this is developing a set of rigorous, comprehensive specifications for the purchase in question.
Defining What’s Needed
Specifications define the purchase requirements for equipment. An engineer may specify a type of equipment or may express a need, and ask potential vendors to suggest equipment that fills it.
When specifications are complete, they are placed in a specification or definition document. All relevant data should be included, such as throughput needs, material compatibility requirements, temperature extremes, measurement variables, control mechanisms, and other relevant data. The specification document is a generalized design product essential in many phases of a project. For most projects, something similar is usually developed by the time procurement is discussed.
If a tank, for example, requires a material of construction with a specific ASTM number because of compatibility considerations, include it in the spec sheet. This document will then be used as a project reference and for bid requests sent out to tank vendors. Typically, a project engineer includes this document in a communication to a vendor, who develops a bid in response to the data given.
Data for specifications must sometimes be created for the purchase of a particular piece of capital equipment, and this work is often under the purview of the project engineer. Unique data is normally required when dealing with an unusual material or your company’s proprietary end product for which there is no published design or scientific data. This effort may involve sending samples of your company’s product or processed intermediate to an equipment manufacturer for a demonstration run to determine compatibility using the particular equipment of interest. These tests should be witnessed by the project engineer.
It is best to obtain relevant laboratory data tested in a lab-scale version of the equipment to be acquired, especially if the equipment is of a new type to the company or if it is of very high value. It is also important to get the determination of the manufacturer in writing, positive or negative, as a formal project document in case the equipment demonstrates problems later. Developing engineering data will help justify the purchase and will put the greater project on a sounder technical basis with evidence of effectiveness. This testing can be done in-house, but for many types of equipment it must be done at a manufacturer’s laboratory. If direct design data are not the product of the testing, then further analysis is required to convert the raw data into equipment specifications. If lab-scale equipment is used for testing, scale-up parameters will also be required.
Specifications are also important because they form the foundation of what are called acceptance criteria. These are benchmark values assigned to process variables that are used to gauge the performance of equipment during start-up, commissioning, qualification, and validation activities. They typically have a range of values associated with them. Acceptance criteria are also used when inspecting equipment as it arrives at the plant site from the vendor.
In large projects, it is common to issue a formal request-for-bid document for expensive or complex purchases. This process allows competitive bidding with an organized, rigorous, and documented process. The object of the request-for-bid effort is not to find the lowest price, but to identify the bid with the highest economic utility: a competitive price and a likely high compatibility with the company’s needs.
The RFB communicates important information to a vendor. It must detail with clarity all the primary needs the capital purchase should accomplish and should include equipment specifications, delivery constraints, bid due date, and company-specific purchasing policy and information.
Specifications should be included in one section in the document and not scattered in different locations. Sometimes, a company includes its purchase terms and conditions. Many companies have templates for employees to use for capital purchases. Formatting should include a title page, index, and page numbers for clarity.
For large projects and risk-intensive purchases, a formal, on-site review of the RFB should be arranged with the bidding vendors. If vendors do not ask for a review, the project engineer should arrange it. Performing a review in person will aid clear communication and avoid costly errors of assumption by vendors.
Once the bids have been received, the bid analysis should be rigorous and documented. A format that incorporates a comparison of critical variable values in each bid is typical. For a pressure vessel, for example, it is appropriate to itemize price; technical variables specific to the purchase, such as the vessel thickness, safety factor, and other ASME code criteria; heat transfer area; lead time and delivery; recommended safety devices; and other specified criteria. Intangibles that would add to the risk of each manufacturer, such as industry reputation or previous experience with them, also should be included. All these variables should be put into a spreadsheet formatted for presentation to allow easy comparison among bids and appropriate analysis.
There are several schools of thought concerning evaluation of bids. Some companies encourage engineers to throw out the low bid automatically, unless it is from a trusted vendor. Some companies encourage or require starting with the middle bid as the basis of the evaluation. A broad-based evaluation should be a high priority, especially for complex, costly equipment; a company’s procurement department can provide guidance in the case of uncertainty.
For smaller capital equipment purchases, a formal RFB process may be overkill. Purchasing generic pumps or small instrumentation from vendors with well-established reputations with the company does not require this level of rigor. Many engineers submit short RFBs by fax or e-mail. A bid analysis should still be done, however, if requesting bids from several vendors or if the equipment is less complex but very expensive. There is no hard and fast rule as to the dollar cutoff value between using truncated bid documents or the rigorous RFB process, so use discretion when deciding.
The Purchase Agreement
A purchase order is created when a winning bid is determined and the decision is made to purchase the equipment in question. The engineer usually initiates the purchase request and it is distributed to various groups for approvals. The decision to buy is confirmed by a purchase order, which is usually generated by the procurement department at the company and sent to the vendor. The vendor will usually include terms and conditions of payment, or recommend changes at this point. Once it is accepted, the purchase order is a legally binding contract between buyer and seller. The PO is the single most important document generated during the purchasing process.
In developing the purchase request, it is good practice to include as much definition and clarity as needed to make a full definition of the purchase. This will protect the interests of the project and everyone involved. It is important for clarity to include the specifications from the RFB in the final purchase contract, either repeated or referenced with a copy of the RFB attached. Unless these specs are included, the contract’s force of law, and thus a company’s ability to seek reparations in case of problems later, is tenuous.
Many companies make very good use of a well-defined purchase order if problems with a purchase arise. In practice, however, some problems that arise are not itemized in any useful way in the purchase agreement and become a matter of negotiation.
For example, a rational person might believe that once a delivery schedule is included in the PO along with the bid, theoretically that makes any delays the responsibility of the vendor and a breach of contract. This is rarely the case in practice. The extent to which a company can pursue legal reparations for even grievous delays is determined by case law and questions regarding this should be forwarded to your company attorney or a contracts attorney. Minor delays are frequent enough that they very rarely form the basis of legal action, and instead, the project manager typically regards them as predictable problems to be pursued amicably with the vendor for resolution.
The purchase order should not, however, be packed with too many stipulations. It should be clear, concise, and as brief as practical in communicating the company’s needs. The more stipulations a company puts into a purchase agreement to reduce its own risk, the more risk it puts on the vendor. The result will likely be an increase in price to cover greater exposure.
If a purchase order is altered in any way, an amendment to the original purchase order must be created, approved by both company and vendor, and documented properly. Once agreed to, any amendments are as binding to both parties as the original purchase order.
Quality Assurance in the Purchasing Process
Most companies have formal policies regarding ownership and control of mechanical equipment and processes, including procurement. These may take the form of corporate design and equipment standards, quality assurance programs, maintenance inspection protocols, or other practices. Referencing the equipment specifications developed by the project engineer in the purchase agreement is the first step toward ensuring quality in the procurement process.
A common practice is to allow vendors to become familiar with a company’s design and equipment standards. If a vendor is not familiar with your company’s standards, consider sending them a copy, but have them sign a confidentiality agreement. This should be done prior to any confidential information changing hands—for example, by including a copy of the company equipment standards in a PO or with a formal supplier agreement with the vendor.
Witnessing of factory testing is one way many companies assure the quality of their equipment purchases. Some companies send a maintenance technician who may witness pressure testing, for example, or review the manufacturer’s weld testing procedures to confirm that the equipment can be expected to be up to the specification.
If a customer decides to witness a manufacturer’s commissioning testing, the project engineer should develop a checklist to guide him and not rely solely on the manufacturer’s protocols. Remember that one is trying to ensure the tests are reasonable and that they have been properly executed. Doing so reduces the risk of the purchase to the company. This level of oversight many times can find and correct quality problems at the factory before the equipment is shipped.
It is important to perform a comprehensive inspection of the equipment after it is delivered to the company site. The inspection, which should be done as soon as possible after the equipment arrives, can have a significant effect on a project’s schedule. If inspection is not done promptly, discovery of equipment problems can be delayed. This is especially true if the engineer did not witness factory testing.
A post-delivery inspection is different from the in-process factory inspection discussed above. It is a comprehensive, final inspection of the purchased equipment prior to its installation. Some of the items or components that are to be verified will not have been manufactured or addressed at the factory site when the in-process inspection was done. Moreover, a thorough test of purchased equipment at the factory site sometimes isn’t viable without hauling an extraneous number of tools, which some companies admittedly do anyway.
The objective of the post-delivery inspection is to find any serious flaws with the equipment that escaped the manufacturer’s internal quality control. Note that this is different from project start-up and commissioning work, where the dynamic performance of the equipment is measured and documented after installation. Many times, the equipment inspection is done concurrently with start-up and commissioning, especially in large expansion projects. That is not a good practice. The cost of rectifying manufacturing flaws and errors increases greatly after equipment has been installed.
Preparation for the inspection is done by developing a checklist based on the purchase order specifications, the unit’s schematic drawings, and quality-related observations. Include the equipment’s original specifications in the purchase agreement. If errors are discovered, they should be addressed promptly. The inspection report becomes an official project document upon completion.
The inspection should be largely visual and should include equipment nameplate and dimensions. Verify true (flat or 90-degree) surfaces, internal surface polish, and other measurable features. Look for cracks or discoloration. Any deviations noted should be communicated to the vendor for resolution.
Checks involving measurement devices upon delivery are at the discretion of the project engineer, depending on the type of equipment ordered. Since post-delivery inspections are normally in the pre-commissioning stage of a project, a full calibration is optional.
If flaws are found and the vendor cannot repair or correct them on-site, then the equipment should be sent back for repairs. If the project schedule cannot accommodate the time required for rework, then the company procurement department and the vendor will need to negotiate financial reparations.
This may seem an overly burdensome method of verifying the condition of your new equipment. It takes time, especially in the learning stages. But once your company has performed a number of inspections, previous inspection reports can serve as templates. It is good practice to include the end user of the new equipment in the post-delivery inspection.
Some capital goods, such as standard pumps, valves, and piping, are more like assembly-line products—lots of units made the same way with little variation. The acceptance criteria of this kind of equipment usually involves a verification of the nameplate data, such as product number, serial number, size, capacity, etc. at the time of arrival to ensure that the proper unit was shipped.
Instrumentation and controls hardware will require more thorough testing, such as an instrument power-up, check-out, and calibration by controls technicians. Testing for each instrument should be documented, including test results and procedures used, for inclusion in the official project file and future maintenance files for the instruments.
Accounting for Costs
Accounting plays an increasingly important role in project management because of pressures to complete projects on time and on budget. Commercially available accounting software benefits the procurement process by allowing superior tracking and reporting capabilities. But this software is complex, expensive, and difficult to learn. A well-designed spreadsheet program with an intelligently designed operating procedure, including an associated work breakdown structure and numerical code generation, will come close to accomplishing the same outcome, but it is not as efficient.
The project will start with a single code number, usually received from the accounting department, representing an approved pot of money for the project. Additional numerical codes are generated, either by the project engineer or the accounting department, for the different areas of capital purchases.
For example, process capital equipment will have been budgeted for a certain amount of money and this will be given a corresponding, dedicated code number. Mechanical equipment, electrical/power equipment, instrumentation, automation, and so on will each receive a code for all capital dollar outflows. (In practice, the list of codes will include all expenses, including design, construction, and the like, but that is beyond the scope of this article.) There may be five to ten capital equipment codes for a medium-size project, and 20 or more for a large, complex project. The outline of the project codes is called a work breakdown structure and it neatly rolls expenditures up into final dollar outflows resulting from purchases. This is the basic essence of how project costs are tightly controlled and tracked.
All purchasing documents generated will use the project number and the applicable numerical codes to track where all the dollars are flowing. The person creating the purchasing documents will indicate a purchase under the code used and the purchasing paperwork gets approved as normal. With the help of a spreadsheet macro program utilizing the entire work breakdown structure, at the end of each month a project reconciliation report indicating all purchases with their corresponding codes is generated.
Below are a few miscellaneous items the project engineer should keep in mind when managing or executing capital equipment purchases.
Troubleshooting other problems
There are certain problems that seem to dog capital purchases time and again. These are mostly related in some way to delivery delays. There isn’t much one can do about minor delays; most are beyond a company’s control and must be adjusted to in the project schedule. Less common are problems such as poor service support from vendors and manufacturers, or inadequate documentation, including drawings, operating manuals, and the like.
If there are not binding stipulations in the purchase agreement relating to vendor support, resolution of these problems is handled through negotiation with the assistance of the company’s purchasing department. Including stipulations related to documentation in the purchase agreement is a common practice in documentation-heavy industries, such as biopharmaceuticals. However, documentation in any industry is very important because operating and maintenance manuals in most companies form the starting point of the maintenance file that will be used by the company for the purchased equipment.
Record keeping and documentation
Being organized with the paperwork generated during procurement has always been important if problems and issues arise with a specific purchase. Engineers should keep a copy of all equipment-related purchase orders and the supporting documentation, including the price quote, negotiated terms, delivery agreements, specifications, additional acceptance criteria, and miscellaneous paperwork with the official project file. An engineer often needs to pull out the purchase order documentation package that supports a company’s position when a problem occurs.
Relationships with the purchasing department …
Project engineers have great responsibilities in capital procurement because of the technical nature of such purchases. Because of the need to troubleshoot purchasing problems, it would behoove the practicing engineer to cultivate at least one or two good contacts with the corporate purchasing group. The procurement folks can be especially helpful in creating contracts with binding terms and conditions. They also can help with internal company approvals for purchase orders and assist with negotiations with vendors when difficult problems arise. Working closely with the procurement personnel is not only professional, but will help prevent future problems.
… And with vendors
A friendly relationship with vendors is often overlooked, but it benefits a project by smoothing the resolution process when problems arise. When equipment and materials are needed urgently, the vendor may be able to help shortcut the time to delivery. Usually, this relationship is developed with the investment of time. Sometimes these activities are viewed skeptically as a waste of time by busy engineers. If a vendor represents a supplier of equipment or processes central to your company’s needs, then it is important enough to warrant an occasional meeting to get to know them. Be mindful of your company’s policy on conflicts of interest, however, when accepting a vendor’s offer for lunch or some similar activity.
Procurement is a crucially important tool in the arsenal of the project engineer. By virtue of the legal aspects of spending other people’s money, its importance should not be underestimated, and the process should be given full attention. To do procurement properly is time-consuming and difficult, but once good habits are formed, the time expended on each purchase will become minimized. Using this regime starting with your next project will give an excellent return on that time investment in the form of reduced timeline delays, adhered-to budget limits, and increased efficiency by reducing troubleshooting.
Stephen Greer is a registered Professional Engineer residing in Michigan. He has worked as a project and process engineer in the chemical, pharmaceutical, biopharmaceutical, and engineering and construction industries, with heavy responsibilities for designing, specifying, procuring, and startup and commissioning of equipment and processes.