Coal, Compressed Air, Gas, Retrofits & Upgrades, Retrofits & Upgrades

EPC Firms: Are they Meeting the Needs of Power Generators?

Issue 12 and Volume 118.

Southern Co.'s Kemper County power plant
Southern Co.’s Kemper County power plant, a 550-MW integrated gasification combined cycle (IGCC) facility in eastern Mississippi, will be the first large-scale coal plant in the U.S. to use carbon capture and storage technology. Photo courtesy: Mississippi Power

By Rick Flaspohler, Flaspöhler Research Group

In partnership with Power Engineering magazine, Flaspöhler Research Group of Kansas City performed an eye-opening survey of 64 key power generation executives to measure the utilization, performance and perceptions of engineering, procurement and construction (EPC) firms serving the power generation industry. Thirty two EPC firms were evaluated.

In addition to gauging the performance of EPC firms, this report also examines the level of construction activity (retrofits/expansions) power producers are planning in the next few years.

To achieve the highest level of accuracy, adaptive interviewing methodologies were used in fielding this survey. Adaptive interviewing recognizes that each respondent’s experience is different, and so too should be each set of questions. Rather than put every question to every power producer, only questions about issues known to be important to each power industry executive were asked. This means that executives were asked to evaluate only EPC firms with which he or she was familiar. Further, they were only asked to rate familiar firms on issues important to them, personally.

Adaptive interviewing removes much of the bias toward larger firms commonly seen in most surveys and levels the playing field for smaller firms.

Power Industry executives who completed the survey believed we asked the right questions. In response to the inquiry, “Do you have the impression that the information collected in this survey provides EPC firms with valuable information about where they should focus?” 95 percent of power industry executives answered “Yes.”

Power Producers Likely to Retrofit Existing Plants

Over one-half of executives we spoke to indicated they are “Very likely” to initiate work toward the retrofit of an existing plant in the next 1 to 3 years. This is a 25 percent increase compared with the 2012 survey.

When asked which areas will be addressed in their retrofit activity, more than 73 percent indicated they will add equipment as a response to emission reduction requirements.

Other key retrofit activities being planned by power producers include:

  • Replace existing equipment with more efficient generating equipment (54.1 percent)
  • Change fuel type (35.1 percent )
  • Add capacity (29.7 percent)
  • Add combined cycle plant capabilities (29.7 percent)
  • Add new fuel capabilities (24.3 percent)
  • Add carbon capture systems (21.6 percent)
  • Enhance cooling systems (13.5 percent)

Power Producers Still Bullish on New Plants

Forty five percent (45 percent) of power producers indicate they will begin work on development of a new power plant in the next 5 years, about the same proportion as in the 2012 study (50 percent).

Of those producers likely to build a new plant, the proportion indicating natural gas will be the fuel source rose from 74 percent in 2012 to 79.2 percent.

While the proportion of producers who would consider solar, wind, coal, and biofuel remained about the same, petroleum climbed from 6.4 percent in 2012 to 29.2 percent in this year’s study.

Satisfaction with EPC Firms Falls

In the 2012 article in Power Engineering, it was noted that, given the anticipated surge in activity expected over the next five years in the power generation sector, it was somewhat disconcerting that that so few power generators were “Very Satisfied” with the EPC firms they used.

More disconcerting today is that power generator satisfaction with the EPC firms they use has plunged even further, dipping from 26 percent in 2012 to just 19.7 percent in our just completed survey.

Given this dip in satisfaction, it should come as no surprise that one in five power generators indicate they will hire a new EPC firm to replace a firm with whom they are currently working. Additionally, 30 percent of power generators indicate they will engage new firms in an effort to better meet their expertise and customer satisfaction requirements.

Because there continues to be great demand for EPC services, several EPC firms today are mistakenly rolling along under the misperception that everything is all right. After all, billings are growing, demand is high and many firms indicate they already have trouble staffing up to complete the jobs already awarded to them.

However, many of the firms who believe that “all is good” simply because they’ve got as much work as they can handle will be in for an unpleasant surprise when demand for services drops, or when a strong competitor has some excess capacity.

Client Advocate Score: The Best Measure of Client Satisfaction

As illustrated in Table 5 (page 25), the primary resource power generators most rely upon for useful information about EPC firms is “advice from peers”.

This is a critical fact that few EPC firms understand, and even fewer – at their peril – bother to measure.

Most power generator executives are more than eager to tell us that, while all EPC firms talk a great game when it comes to client service and satisfaction, very few actually measure these important items. One executive wryly noted, “It’s an industry full of brilliant engineers who can calculate anything, except whether or not we’re happy with the services they provide.”

Perhaps the best measure of client satisfaction is Client Advocate Score (CAS).

In 2003, researchers everywhere were stunned by an article in the Harvard Business Review titled “The One Number You Need to Grow” by Frederick Reichheld, a director emeritus of the consulting firm Bain & Co. What Reichheld discovered in a study of more than 4,000 consumers is that a company can, very accurately, anticipate its success based on how customers answer the question: “How likely is it you would recommend (company X) to a colleague?”

“If growth is what you’re after, you won’t learn much from complex measurements of customer satisfaction or retention,” Reichheld writes. “You simply need to know what your customers tell their colleagues about you.”

Based on the answers to this question, a CAS is calculated. A company’s CAS is simply a net measure of whether or not a company’s clients are advocating usage of the company to colleagues.

In this year’s survey, we asked power executives how likely they would be to recommend the EPC firms they currently use. The CAS for each of these firms was then calculated. While the average CAS for all professional-services industries we measure is, surprisingly, about “0,” the average for insurers in this survey is -1.5. In other words, the typical EPC firm today will have a greater proportion of clients cautioning against use of the firm than proportion recommending the firm.

There are, of course, EPC firms whose clients are very happy.

The highest CAS in the survey was 57.1, for Foster & Wheeler. The lowest CAS in the survey was -66.7.

A&E firms earning CAS scores of 15 or higher, in alphabetical order, are ABB, AMEC, Babcock & Wilcox, Black & Veatch, Burns & McDonnell, Foster & Wheeler, HDR, Kiewit Corporation, Parsons Brinckerhoff, Stanley Consultants, Wärtsilä NA and Zachry Holdings.

EPC Firms Receiving Highest Quality Ratings

Another important measure of client satisfaction is how well firms perform on the specific factors most important to power generators when they evaluate EPC firms.

Power generators were asked to rate those firms with whom they were familiar, on those factors they felt were most important in their own EPC firm evaluation and selection process.

The top rated firm on each factor is listed in Table 1, which shows seven different firms receiving top ratings for eight different evaluations factors. Only Burns & McDonnell received a top rating for more than one factor.

table 1
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Also shown is each of the A&E firms who received an average rating of “7” or higher on each evaluation factor. A rating of “7” or higher is typically associated with performance excellence on a given factor. (The scale was 1 to 9 with 9 = Very Strong and 1 = Very Weak.)

The number of A&E firms receiving a “7” or higher rating is high for most factors. However, the scarcity of firms earning this rating for the factors Provides Responsive Service and Offers Excellent Value is indicative of an industry whose players focus so much on the technical aspects of the product that they often overlook the relationship/customer service part of the business.

table 2
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Further evidence of the general decline in relationship/customer service performance of EPC firms can be found when comparing the “average” EPC firm rating in 2012 versus 2014.

Average EPC firm ratings dropped on six of eight factors.

The only factors upon which power generators saw improved performance, overall, were Employs Superior Internal Project Management and Is an Exceptional Company.

How Easy are EPC Firms to Do Business With?

A final metric used to help EPC firms better meet power generator needs is Ease of Doing Business (EODB).

EODB measures the overall perception of whether power generators believe each EPC firm is easy to work with or difficult to work with.

table 3
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The question is simple; “How easy is it to do business with (EPC firm)? ” Power generators answer with a number from 1 to 10, where 10 = Very Easy to Do Business With and 1 = Very Difficult to Do Business With.

Any score of “7” or higher is considered good, and scores of “8” or higher are considered exceptional.

Today, only four EPC firms are considered “exceptional” by power generators in how easy they are to do business with. These firms (in alphabetical order) are AMEC, Burns & McDonnell, Kiewit Corporation, and Zachry Holdings.

The 7 A&E firms receiving ratings of “7” or higher are: (alphabetical order) Babcock & Wilcox, Black & Veatch, HDR, Sargent & Lundy, Stanley Consultants, URS and Wärtsilä NA.

Looking Ahead

A recent period of increasing demand for EPC expertise has resulted in in a sort of renaissance for firms active in the power generation market.

table 4
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Old-line, well established firms enjoy being in a position to focus on the most attractive opportunities. Smaller and newer firms are making steady inroads as they pick up assignments that the long established EPC firms are unable or unwilling to take on.

As power generators are exposed to more EPC firm options, the perceived differences between firms are shrinking, especially in areas related to technical expertise and technology. The result is that power generators look more carefully at pricing, since they are less likely to see significant differences between firms.

As the perception of EPC firms becomes more commoditized, power generators will begin to examine pricing more carefully. Evidence that this is already happening is that the factor upon which power generators rate EPC firms the lowest is Offers Excellent Value.

This will play out the way it does in most professional services markets, with power generators increasingly looking at “responsive service” and “relationship” factors as being key in EPC firm evaluation and selection.

table 5
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In short, the days are almost over when all an EPC firm had to offer to be successful was great technical expertise and technology. Power generators today also want excellent customer service and strong relationships.

Duke Energy
Duke Energy’s Cliffside Modernization Project. Duke Energy renamed Cliffside the James E. Rogers Energy Complex after former CEO Jim Rogers. Photo courtesy: Duke Energy

If you are an EPC firm interested in learning more, contact Rick Flaspöhler at [email protected].

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