I designed the knock-out drum in March while recovering from surgery. I was ready to hire the contractors and fabricator by May — and ran right into the supply-chain bottleneck. Negotiations with the fabricator dragged on for weeks. A project that might have met a July deadline drifted. A drum that cost $50,000 in 2018 was now $85,000. Then, when stainless steel sheet in the right gauge was unavailable, I changed the design to plate. That pushed delivery back to August.
Or so we thought. The head supplier said it could deliver by the end of September. Then, the firm dropped us altogether because, I guess, the project wasn’t big enough. Fortunately, I remembered a small steel fabricator in Wisconsin. It could do the job and promised delivery in late December.
However, we weren’t out of the woods yet. The manway vendor wanted more money. The manway cost went up 41% and its delivery was delayed six more weeks. So, we’re now expecting to get our knock-out drum this month (February), nine months from the original scheduled completion.
It’s sagas like this that cause companies to give up on projects for the year! I know the past year has been hard on constructors. (Fortunately, my outfit is short-staffed. So, I’m busy cleaning up as-built drawings, doing design work for a future project, and making a dent in the backlog of process hazard analysis studies.)
It’s difficult to forecast the end of the bottleneck and the effect of inflation on capital budgets but let me pass along some sage advice gleaned from my work on capital projects in the 1980s. I remember having to resurrect in 1989 projects shelved in 1984, and wondering how I ever would complete them.
The supply problem is easy. Stay away from big suppliers unless yours is a $1,000,000+ project. Instead, look through old files for smaller suppliers you’ve already used and that have performed well. Some of these firms may no longer exist, though, because of the pandemic or other reasons.
Inflation affects labor rates and materials differently. Labor inflation isn’t a leading indicator of material inflation, as shown in “The Relationship Between Labor Costs and Inflation: A Cyclical Viewpoint”. Labor inflation always lags that of materials. That’s because a company’s human resource department stubbornly fights labor cost increases while a supplier easily can change material prices.
So, all theory aside, here’s how to manage budgets and schedules for projects during 2022 as the pandemic and its effects persist. First, add a 30% factor (1 + 0.3) to your material estimates for the next two years. Use a 15% factor for labor rates. According to my discussions with fabricators and contractors, skilled labor is scarce and rates are rising. Allow a generous 20% contingency in FEL-2, the front-end-loading (FEL) step that estimates cost of major equipment based on bids from past projects. (For more advice about FEL, see “Don’t Flub Front-End Loading.”) Include a 10% contingency for FEL-3, the estimate based on preliminary quotes.
Corporations during these times should show more lenience regarding budget estimates. However, if a company resists the contingency and seeking contractor estimates, pad the estimate to stash the contingency. I suggest fattening up shipping costs, overhead, miscellaneous costs, over-time and hours; as a general practice, use a 10% adder to any labor hour estimate. For more thoughts on this, see “Pad Your Estimate.”
What about projects forecast beyond 2023? Corporate management, to avoid embarrassment about over-runs, should update the project estimate annually to account for inflation. In addition, it’s a good idea to confirm each year that vendors and others you are thinking of using still are in business.
Another concern is currency conversion if you work at an international company based in another country. Adjust the rate and the budget prior to approval of a project. The same is true for the bids if it’s an FEL-3 estimate.
As far as scheduling goes, carbon steel is plentiful but stainless steel is not. Supply-chain shortages caused by ramped-up government spending on infrastructure likely won’t surface before 2023. However, delays might afflict controls and other equipment that depend on semi-conductors; chip supply won’t be back to normal until well into 2023. For now, I am planning an additional three months in delivery of any major capital equipment.