CHANGE ORDER MANAGEMENT TO PROJECT SUCCESS
- 1. TOPIC: CHANGE ORDER MANAGEMENT TO PROJECT SUCCESS: ABSTRACT It can be argued that the successful management of change is crucial to any organization in order to survive and succeed in the present highly competitive and continuously evolving business environment. The purpose of this paper is, to provide an industrial views / Action to Reduce / Minimize the changes (either it is an Engineering change or a Commercial change) at post award of Contracts or Purchase Orders. Supply Chain Team plays important role towards constructing a new framework for managing changes. 1. Introduction: Change Order Management is the backbone of the Project. Project Team need to handle it very strategically to achieve the Project Success. In Oil & Gas, Power, Petrochemical Industrial, We generally build Large Refineries, Chemical Plants. It is a huge Investment by the Government / Private Investors. Governments / Private Investors do the feasibility studies in critical areas concerning to the project For example cost & schedule, Site Environmental condition, Design, Process, Safety, logistic, cultural differences and political & social interference etc. with the help of Engineering Consultants / Financial planners / Project Planners / Equipment Cost estimation / Construction Cost Estimation etc. Based on the inputs from these consultants, Investor will take a decision to Kick-start the project, if find it feasible or profitable (will able to complete within the desired schedule & Cost). Here in this paper we will focus How Change Order Management plays critical Rolls in project success / failure. Cost & Schedule is the only key components shall be impacting due to changes. 2. Definitions: Change Order Management: A change order Management is a component of the change management process whereby changes in the Scope of Work agreed to by the Owner, Contractor and Architect/Engineer are implemented or executed. Project Cost: The project cost is the total project cost which includes engineering fees, material costs, and construction costs, permit fees, land, furnishings, financing and all other costs that were incurred in completion of the project. Project Schedule: The Project Schedule that communicates what work needs to be performed, which resources of the organization will perform the work and the timeframes in which that work needs to be performed. It is a part of Contact documents.
- 2. 3. Basics: We define Project Cost in 2 major heads, Material Cost and Construction Cost (Appx. 90%), balance 10% is the miscellaneous costs. You will surprise to hear that Material Cost, specially the Project Long Lead Materials comprising 35-40% of total project cost. For example in building a Petrochemical plant, we need Boiler, Waste water Treatment plant, Cooling Tower, Transformers, DG Sets, Pumps, Electrical Cables, piping bulks, Electrical bulks, Instrumentation’s bulks and many other small items / Equipments. The Equipment Purchasing Cost & manufacturing / fabrication process must be closely monitored with respect to allotted budget and Project Baseline schedule respectively. 4. Change Order Management: When we think about Change Order Management following questions start running around us: A. Who initiate the Change Order & Why we need Change Order after placing the Purchase Order? B. Who approve the Change Order? C. Who negotiate & release the change orders to the Supplier? D. How Change orders impacting the Project overall Cost & Schedule completion date? E. What actions should be taken to minimize the Change Orders? Answering these questions create a firm foundation about the understanding on Change Order Management. A. Change order could be initiated by Equipment Responsible Engineer / Buyer. a. Change order initiated by the Engineer is termed as Technical / Engineering Change Order, mostly due to the any one or more of the reasons listed below. Size/ capacity of Equipment Change Process Change Client Inputs Construction Inputs HAZOP (Hazard and operability study) Change in quantities (Increase / Decrease) /substitution of one item for another b. Change order initiated by the Buyer is termed as Commercial Change Order , mostly due the following reasons Inadvertently omission of supplier’s commercial offers few pricings. Inadvertently follow the wrong Technical Bid Evaluation Sheet. Price Calculation Error /change in price for an ordered item Delivery Extension
- 3. B. In general Technical Change order will be approved by the Engineering Manager / Client (if applicable). Commercial Change orders will be approved by the Project authorised signature matrix listed approval Authorities or by the clients (as agreed in Client Contract). C. Buyer will negotiate & release the Change Order to the Supplier. D. Change orders impact the Project in terms of Cost & schedule, it can be positive cost impact (means reduction to the PO value) or Negative cost impact (means increase in the PO value). In terms of schedule, if material delivery delayed from the agreed PO contractual delivery date than it will extend the overall project completion date. If we get early delivery of material than we can save the construction cost or overall project cost with respect to the budget by early completing the project. E. We can minimize or optimize the change order counts, but not touch the zero count. For example, in large Project, Material Requirement / Requisition were generated by the Engineering disciplines such as, Civil, Structural, Mechanical, Electrical, Control System, Piping, and Safety etc. Mostly the lack of close coordination or communication gap between engineering departments will leads to origin of Change Orders on the projects. Following action must be taken to optimize the change order counts. a) Conducting Weekly / Bi-weekly meetings among engineering disciplines before release of technical RFQ to the Procurement Department. b) Peer review of engineering documents by discipline colleagues. c) Early involvement of Procurement, Quality department in reviewing the technical RFQs. d) Client review of Engineering RFQ e) Buyer must review & crosscheck the commercial offers pricing in detailed manner to eliminate the wrong prices errors. f) Buyer must read the Engineer’s issued final Purchase Requisition OR Technical Bid evaluation. g) Price calculation error must reach to the zero count; it can be archived by re-checking and getting the peer review of prices. h) Delivery extension Request always comes from the Supplier, buyer to issue the change order based on the facts presented by the supplier. 5. Conclusion: All projects, even the best planned projects, will experience change, and there will be costs, impacts, and disruptions associated with implementing the changes. So we need to minimize or try to remove the root cause of Change Orders. This paper will help you more in achieving the organization goals of best change order management in terms of minimizing the change order counts.