5 Questions Every Project Sponsor Should Ask Before Approving a Procurement Plan

A lot of capital projects don't fall at the finish line. They fail months ahead of time at the stage where a procurement plan is approved but not given sufficient attention. Sponsors typically review the budget, look at the schedule, and approve. It's the hardest ones, those that determine when equipment gets to the job, at the quoted price and specification, that never get asked.

The consequences of such a move are well known. Researchers found cost overruns in over 60 percent of 662 energy infrastructure investment projects in 83 countries with a combined investment of $1.358 trillion. Where many of those overrun start in Procurement.

These 5 questions can be used to safeguard your investment before you put it to work whether you are building a solar farm, an offshore platform, a vessel conversion or a hyperscale data center.

1. Does the Schedule Reflect Today's Real Lead Times?

Much of the procurement planning still depends on the lead time requirements that were in place prior to the disruptions of the recent years in the supply chain. This is one of the quickest methods to create a wrecked agenda.

Consider power equipment. The average lead time for standard large power transformers from order to delivery has risen to approximately 128 weeks this year from just 140 weeks in 2023.The Lead time for Power transformers (substation) is now in excess of 160 weeks from order to delivery against around 140 weeks in 2023. Turbines are no exception: There are three years plus lead times on new orders for heavy-duty gas turbines.  It takes more than 40 weeks to formulate a plan. It is a time lag you've yet to experience.

What to ask: Do you use written supplier confirmation or historical averages for lead times? What are the critical path items and what would the schedule be like if they were delayed 6 months?

EPC, like any other project management, values long-lead items as schedule drivers from the beginning of the project. It is not looking at them as a line item to be sorted after awarding a contract.

2. Who Owns the Risk When Procurement Goes Wrong?

The risk of procurement will not go away. Takes place between the owner and the EPC contractor and the suppliers. Issues arise when no one knows whose it is.

With an integrated delivery model, one party is responsible for design, sourcing, fabrication, and installation. It is this accountability that is the foundation of turnkey EPC solutions. But the word turnkey does not automatically mean "guaranteed". Often contracts specify owner supplied equipment, price escalation or impose a limit on suppliers' liability in the case of a delay.

Key questions to consider: When does a contractor's responsibility begin and end with regards to supplier performance? What constitutes delays for liquidated damages, and what constitutes delays for relief and change orders? What are some things you don't know that would catch you off guard in case of a battle?

3. Is the Bid Comparison Based on Total Value, Not Just Price?

Lowest bid may seem to be a good idea during the approval meeting and turn out to be the costliest selection on the project! An under-quoted supplier can make up for this later in the process by changing orders, late submittals, and quality issues that arise at commissioning.

A proper evaluation is more than the unit price. It should include:

• Technical compliance: Is the offer technically compliant, or does it allow exceptions which move cost downstream?

• Credibility of delivery: Is the supplier using the factory capacity, or does he have a proven history of meeting delivery dates?

• Quality and testing: Do factory acceptance tests and inspection points have a definition and are they scheduled?

• Commercial terms: What are the arrangements for payment of milestones, warranties, and price validity?

A low-cost valve and/or compressor package that doesn't pass inspection can stall a whole mechanical completion task in oil and gas.

Questions to pose: Did the bid go through a cross functional evaluation process, and does the recommendation include the total cost of ownership, not just the price of the product?

4. Does the Plan Account for Supply Chain Concentration and Market Pressure?

Procurement plan for single supplier, single region or single factory slot is fragile. It can be magnified in market conditions very quickly.

It is apparent from data centers. Between 2026 and 2030, the amount of capacity being added to the U.S. data center sector is estimated to increase from approximately 24 GW to 110 GW, and each new data center project is competing for use of the same transformers, switchgear and generators that are being installed by utilities and renewable energy project developers. The same opens the door for competition with solar and wind projects for grid interconnection equipment.

It is important that this is addressed directly in the plan by the sponsor. Practical mitigations include:

• Qualifying more than one supplier for critical categories

• Pre-booking factory slots, possibly before design is complete

• Assessing prefabricated or modular solutions to lower risks on site

• Embedding escalation and tariff protection in contingency rather than assuming it will be stable on the price front. Incorporating escalation and tariff exposure as contingency instead of assuming it will be stable on the price front.

Questions to ask: What is the next supplier if our main supplier is late? How long does it take to get it going?

5. Is Procurement Integrated with the Full Project Lifecycle?

Procurement is typically isolated as a function. Design ends and procurement follows, and construction takes the fall if there are any. That will lead to rework, late changes, and pricey surprises.

A successful EPC project lifecycle management connects procurement with engineering development, construction planning and commissioning. Ordering equipment before the design is finalized can lead to change orders. If you order too late, you will have to cancel the schedule. The timing will depend on the extent of scope definition in the front-end planning but should be intentional and based on those trade-offs.

What to ask: How to link up the procurement milestones with engineering release dates and construction start? Who will be liable to settle disputes between them?

Turning Questions into Approval Criteria

The following five questions can be used if they turn into gates rather than a single conversation. Sponsors should require a procurement plan to include:

• A register of items that could be on the critical path which has confirmed dates

• A risk allocation matrix identifying who has the responsibility for what procurement risk.

• A bid evaluation summary based on the total value and NOT price alone.

• A contingency plan from the supplier for the most at-risk categories.

• One integrated milestone schedule for engineering, procurement, construction and commissioning

If these cannot be achieved by a plan, it's not because of paperwork. This is an indicator that the plan is not ready to be approved.

Final Thoughts

The project sponsor's most significant decision is the approval of a procurement plan. Instead of it being a formality, asking about risk ownership, bid quality, supply chain resilience and lifecycle integration will transform that approval into true risk management. As supply chains are strained and demand increases in all capital-intensive industries, it is the sponsors who ask the right questions early who will get it done on time and on budget.

To get the expert advice throughout your EPC project, schedule a consultation with Alga Processing LLC.

Alga Processing LLC is an organization that helps your business in operations and management. Its people come from various backgrounds of knowledge and experience that promote a healthy environment for your personnel. Your organization will benefit from ensuring you and your team members are there every day to give the time and talent to yield productivity to its maximum. Contact us for more information on how to help your business grow.