"Buying Wisely," Feature Article, October 2008

buying wisely

Don’t shortchange the procurement process. It can cost you in the long run.

by Stephen Greer

An often-overlooked aspect of project engineers’ duties is the procurement of capital equipment and services. Project engineers spend a corporation’s dollars to implement a project that will enhance operations and profitability. Large-investment capital spending can have high risk. By using an intelligent, rigorous process for capital procurement, companies can reduce that risk.

Proper procurement practice dictates that this function be integrated into the greater management structure of a project. Failure to do so can result in cost overruns, missed schedule milestones, poor equipment performance, and poor vendor relationships. Activities such as equipment specification, scope development, contract structure, and applying corporate standards should all be completed prior to actually spending money.

Rigorous equipment specification is sound engineering practice and is important in capital procurement. A complete and robust specification document serves as the basis of all important procurement activities: requesting a bid and competitive bidding, purchase contract development, and interim and final quality inspection of the delivered equipment.

THE REQUEST FOR BID

Competitive bidding is the basis for all purchasing. Issuing a document requesting bids from potential suppliers, called a request for bid (RFB), facilitates this process by efficiently communicating important information to a vendor. It must detail your needs and should include equipment specifications, delivery constraints, bid due date, and company-specific purchasing policy and information.

The equipment specification document developed earlier in the project should be included in one clearly written section in the RFB. A company usually includes its purchase terms and conditions (T&C) in the package as well. The T&C are legal stipulations generalized for purchases by the company and are developed to guard a company’s financial interests and dictate payment terms and delivery.

For large projects with complex, risk-intensive purchases, a project engineer should hold a formal, on-site review of the RFB 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.

THE MOST IMPORTANT DOCUMENT

Once the bids have been received, a rigorous, organized, and documented bid analysis should be done. A format that incorporates a comparison of critical variables’ values in each bid should be designed. Price, technical specifications, and other important variables should be included for comparison and arranged in a spreadsheet to allow for ease of review. Analysis of the bids is as varied as the people who perform it. Talk with your company’s procurement personnel for guidance.

Smaller capital equipment purchases, such as an individual pump or instrumentation, often do not require this level of documentation. A faxed or e-mailed RFB will often suffice. A bid analysis should still be done, however.

The usual vehicle to buy a piece of equipment in most companies is the purchase order (PO or purchase “contract”) document. Once it is generated and accepted by both vendor and company, a purchase order is a legally binding contract and is the single most important document generated during the purchasing process.

The specifications developed for the equipment and included in the RFB should also be put in the purchase order, either by reference to the request for bid or repeated verbatim. Any verbal contracts with the vendor should be spelled out in the PO; also include additional required stipulations, aforementioned specifications, standards, and acceptance criteria.

The purchase order should be clearly written, concise, and as brief as practical. A well-defined purchase order should be used as a legal brace if significant problems arise. The extent to which a company can pursue a legal case isn’t clear-cut, however. Questions regarding this should be forwarded to the company’s attorney.

If a purchase order is altered in any way once it has been generated and approved by both sides, standard best practice states that a written amendment to the original PO is required. Amendments to any contract must be approved in writing and accepted by both sides. Once agreed to, the amendments have as much legal standing as the original PO.

QUALITY ASSURANCE AND CONTROL

Highly competent companies often have rigorous institutional control over equipment ownership, operation, and maintenance, as well as procurement. The most common vehicle for achieving this control is official corporate equipment and design standards. A vendor should be familiar with a company’s internal standards and, if not, may need to receive a copy. The vendor should sign a confidentiality agreement, however, before any confidential information changes hands, whether you include a copy of the company standards in the PO or with a formal supplier agreement.

One way to ensure the compliance with a company’s internal standards is to witness factory inspections, in-process tests, and the manufacturer’s commissioning of the equipment. For example, a qualified maintenance technician may witness pressure testing of a rated pressure vessel or review the manufacturer’s weld testing procedures for custom fabricated equipment and, at the same time, inspect randomly selected welds.

Up to the task: One way to see that equipment meets your company’s standards is to witness inspection and testing at the factory.

A checklist specific to the equipment that was ordered should be developed for the purpose of the factory inspections. The point of this level of oversight is to design a meaningful inspection regime that will flag quality problems at the factory before the finished equipment is shipped to the customer.

A comprehensive inspection after delivery to the company site is one of the most important activities in capital procurement. This is separate and distinct from the quality inspection discussed in the previous section. If inspection is not done promptly, discovery of serious equipment problems can be delayed, with impacts to downstream areas of the project.

A rigorous post-delivery inspection is required because there may be serious flaws with the equipment that escaped the manufacturer’s internal quality control. The engineer is better able to thoroughly inspect the equipment at the company site rather than the factory site. The equipment should be inspected against the original specifications included in the purchase agreement. Errors or problems should be taken up with the vendor immediately because of potential schedule and cost implications of capital equipment rework.

Similar to the checklist for the manufacturer’s inspections, a second, more comprehensive regimen should be developed for the post-delivery inspection. Note that this is not project commissioning testing, but due diligence to ensure that what was ordered was delivered. The inspection report becomes an official project document upon completion.

WHAT TO LOOK FOR

The content of the inspection should include mechanical, electrical, controls, and documentation items. For example, equipment nameplate, dimensions, true (flat or 90-degree) surfaces, internal surface polish, and cracks or discoloration should be checked. Any deviations should be communicated to the vendor for resolution. If a powered off-line test is possible, consider this for controls and electrical inspection of the equipment.

Checks involving measurement devices should be included, depending on the type of equipment ordered. Since this is usually precommissioning activity, calibration of instrumentation for this activity is desired, though not required.

Due diligence: Inspection as soon after delivery as possible will ensure that what was ordered is what has been delivered.

Standardized manufactured equipment, such as pumps and instrumentation, do not need an extensive inspection upon delivery. An equipment tag verification, including product number, serial number, size, speed, and other such items, is sufficient.

If flaws are found and the vendor cannot repair or correct them on-site, then the equipment should be sent back to the manufacturer 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 resolution and do the repairs another way. The vendor or manufacturer should take full ownership of corrective actions for problems that are of their own making.

It goes without saying that performing an equipment inspection during project commissioning after the equipment is installed is very bad practice. It is fraught with risk to the project because the financial cost of rectifying errors increases greatly after equipment has been installed.

Formal, rigorous procurement is an intensive process that takes a great deal of time to develop and execute. A high-quality procurement execution with no major problems should be the goal with all capital purchases. All steps should be planned ahead of time, executed competently, and documented for future reference.

Like anything in professional life, with practice comes perfection. And it is time well spent. A formal procurement process reduces risk to everyone involved in a capital purchase and helps ensure a happy end-user.

To Read More

In a companion article, “A Procurement Process for Capital Equipment,” published this month on Mechanical Engineering Online, author Stephen Greer goes into greater detail about key aspects of managing large investment purchases. He offers tips on topics ranging from cost accounting to communicating with vendors. You can find the article at www.memagazine.org under “This Month’s Exclusives.”

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.