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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : International Journal of Project Management, Volume 32, Issue 3, April 2014, Pages 519–528
Accurate cost estimation is essential for any Engineering–Procurement–Construction (EPC) contractor accepting profitable projects because the project price is determined prior to receiving the contract. Therefore the contractor needs to ensure engineering man-hours (MH) in order to estimate project costs accurately as well as carry out the accepted orders. In this paper, we develop MH based order acceptance strategies and investigate their effects on the total expected profit through a long-term operation in EPC projects under a competitive bidding situation. To this end we build a simulation model describing relations among the volume of MH for cost estimation, accepted orders, revenues, and profits in EPC projects. Using our model, we show that the strategy, which maintains the appropriate balance of MH for cost estimation and project execution under the variability of accepted orders with competitive bidding situations, improves the total expected profit in EPC projects.
Although there are various types of project contracts, the importance of Engineering–Procurement–Construction (EPC) projects (Ranjan, 2009, Towler and Sinnott, 2008 and Yeo and Ning, 2002) is widely recognized in the fields of construction, civil engineering, plant engineering, and so on, because of the increasing client requirements for reduced project cost and for a shorter schedule. In EPC projects, the contractor has the sole responsibility for project cost, quality, and schedule under a fixed-price, which is determined before the start of the project as a lump-sum contract. Thus a reduced project cost and shorter schedule are expected as Ranjan (2009), Lotfian et al. (2010), and Jinru (2011) stated. In EPC projects, a contractor is usually selected by a client through a competitive bidding process (Helmus, 2008, Ioannou and Leu, 1993 and Rothkopf and Harstad, 1994). Namely, the client prepares a Request For Proposal (RFP) for the order and invites several potential contractors to submit bids. The client evaluates contractors on the basis of the multi-attribute bid evaluation criteria, such as bidding price, past experience, past performance, company reputation, and the proposed method of delivery and technical solutions (Helmus, 2008, Kerzner, 2009 and Watt et al., 2009). Then, the client basically selects the contractor who proposes the lowest price if there is not much difference in other criteria. The selected contractor undertakes a series of tasks including detail engineering, procurement, and construction by directing and coordinating subcontractors within the limits of the predetermined budget and according to the predetermined schedule. Since the contractor takes a significant risk with the project in the EPC contract, it is necessary for any contractor to determine the bidding price based on a precise estimation of its project cost by defining the project in as much detail as possible. If the contractor's bidding price is set higher than that of a competitor due to cost estimation error, the contractor could fail to receive the order. Conversely, if the cost estimation error results in an underestimation of the cost, the contractor would be granted the order; however, he would eventually suffer a deficit due to this order. Cost estimation, however, is the highly intellectual task of predicting the costs of products or services to be provided in the future based on the analysis of the current client's requirements. Therefore, experienced and skilled human resources, i.e., engineering man-hours of skilled engineers (hereafter referred to as MH), are required for accurate cost estimation. Those resources, however, are limited in any company; furthermore, once the orders are successfully accepted, the corresponding projects will also need considerable MH to carry them out at the following periods. If the contractor accepts many orders during a particular period and thus cannot secure a sufficient volume of MH for estimating cost accurately, the profits in the following periods would decrease. This is because the probability of accepting loss-making orders increases as the cost estimation accuracy decreases in competitive bidding (Ishii and Muraki, 2011). As a result, the contractor suffers unstable and low profits during the following several periods. For these reasons, to maximize the expected profit through a long-term operation in EPC projects, it is important for any contractor to accept orders with careful consideration of the appropriate MH balance of the cost estimation and project execution. However, the competitive bidding brings uncertainty of the volume of accepted orders, and hence, most contractors usually try to accept as many orders as possible to accomplish their original target for the volume of orders, especially when the uncertainty is large. As a result, contractors tend to accept an excessive volume of orders which reduces the MH for cost estimation in the following periods and diminishes the profit through a long-term operation. In this paper, we develop MH based order acceptance strategies and investigate their effects on the total expected profits through a long-term operation in EPC projects under a competitive bidding situation. We build a simulation model describing the relations among the volume of MH for cost estimation, accepted orders, revenues, and profits in EPC projects. Using our model, we evaluate the effectiveness of order acceptance strategies from the perspective of the total expected profit in EPC projects through a long-term operation. We then show that the total expected profit can be improved by the MH based order acceptance strategy which maintains the appropriate balance of MH for cost estimation and project execution through a long-term operation in EPC projects under the variability of accepted orders with competitive bidding situations.
نتیجه گیری انگلیسی
In this paper, we investigate the effects of the order acceptance strategy on the total expected profit through a long-term operation in EPC projects under a competitive bidding situation. For this purpose, we develop three order acceptance strategies, all of which affect the balance of available MH for cost estimation and project execution in EPC projects. We evaluate the effectiveness of the strategies from the perspective of the total expected profit in EPC projects through a long-term operation by using a simulation model describing the relations among the volume of MH for cost estimation, the accepted orders, revenues, and the profits in EPC projects with competitive bidding. Based on the simulation experiments, we reveal that the contractor must avoid bidding and accepting excessive orders to improve the expected profit through a long-term operation in EPC projects. Although the contractor usually tries, in practice, to accept as many orders as possible to mitigate the risk of losing many orders in competitive bidding, it is important to maintain the appropriate balance of available MH for cost estimation and project execution for improving the expected profit. Furthermore, we show that the MH based order acceptance strategies, which control the volume of accepted orders (VAO) based on the target revenue at each period with the upper limit constraint on the accepted orders, are effective in achieving the appropriate balance of MH under the variability of accepted orders, and thus they improve the expected profit from EPC projects with the competitive bidding. Managing the balance of MH for cost estimation and projects execution under the variability of accepted orders is critical for the EPC contractor to make a stable profit from accepted projects. Namely, an engineering MH based management framework consisting of the MH based order acceptance strategy, MH monitoring, and MH based scheduling under the constraint of the total volume of engineering MH is worth studying in the future. The MH based scheduling regarding cost estimation and projects execution under the dynamic order arrivals is an especially important issue. Furthermore, in the MH based order acceptance strategy, a method of appropriate MH allocation to each order for cost estimation should be examined to improve the expected profit from orders.