Procurement & Materials Management Lessons Learned

Petrozuata - Vehop Project

Purpose:
To identify lessons learned from the Petrozuata-Vehop project. This information was compiled
based on reviews of on-going Procurement and Materials site operations with the following
individuals:
Steve Frantzen (Procurement & Materials Manager)
Robert House (Procurement & Materials Manager)
Ed Wallace (Piping Fabrication)
Arie Bengmos (Senior Purchasing Specialist)
Judith Clements (Senior Purchasing Specialist)
Pablo Reyes (Purchasing Specialist)
Randy Patrick (Material Control)
Dan Webb (Material Supervisor)
Stanley Muffett (Warehouse Manager)
Jaime Garza (Material Coordinator)
Steve Blevins (Material Coordinator)
Dan Chasse (Material Coordinator)
Jorge Duchini (Logistics Manager)
John Gauthier (Subcontracts)

General:

The very first priority on the project should be the development of the Procurement and
Materials execution plans and procedures. The development of these procedures will force
the consideration and resolution of critical issues and potential problems, such as staffing,
training, and scheduling, as well as strategies for blanket orders, subcontracting, fabrication,
traffic and logistics, and divisions of responsibility. This is particularly true of joint venture
projects since you are dealing with different companies that normally have different strategies
and procedures. (There was an execution plan developed for this project, but it was at least a
year late).
A base level of Procurement and Materials key project personnel is required onsite to
successfully manage the construction materials effort. On Vehop, the P&M expatriate staff
was planned to be minimal, but later it needed to be increased substantially in reaction to the
many problems.

Materials Management System:

The Vehop project utilized Parson's DMCS (Document and Material Control System) for
materials management. The system has been plagued with various problems throughout the
course of the project and has negatively affected P&M execution and credibility. Some of the
more significant ongoing problems include:
Inability to effectively electronically download bulk quantities from the CAD model.
Performance and system downtime at the job site.
Inaccuracies in critical reports.
Unexplained changes in data.
Inadequate system training and support.

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On joint venture projects such as Vehop, the KBR IPMS (Integrated Project Management
System) should be used unless there are critical overriding justifications. The materials
management system should be selected based only after a complete functional evaluation of all
available systems is performed. After system selection is made, adequate system training and
support must be planned for and provided. This is critical to joint venture projects where some
users may not be familiar with the system.

Piping shop Fabrication:

The Vehop project utilized two in-country fabricators - Shaw and Prefabac. Over the course of
the project the estimated number of spools has grown from 14000 to 35000 (supposedly with no
scope change).
Lessons learned:
Separate orders were place with each fabricator to provide all piping materials for the project.
As a result, the shops had no priority or interest in expediting the materials. It is
recommended that future projects free issue the materials to the shops to enable more control
over the expediting and shipment.
One of the shops, PREFABAC, was paid based on welding and fabrication of spools. This
resulted in no economic motivation for them to paint and ship the fabricated piping. Future
orders should provide some sort of economic incentive to complete and ship the spools
(payment for shipment).
Since the shop fabricators purchased all the materials, their shipments did not go through the
project freight forwarder: Fritz. The material shipments were also made to ports close to the
shops, not to the approved project CAU port. There was little advance notice or coordination
of the shipments. This caused delays and problems in documentation and customs clearance,
since the paperwork for all CAU materials must be routed through the CAU port. Future
projects need to plan better and develop procedures to expedite the customs clearance of
these materials since there can only be one CAU port.

Instrument Bulk Materials:

On Vehop, Control Systems Engineering requisitioned the instrument conduit and wiring
separately from the Electrical conduit and wiring (with different codes and descriptions). All
of these materials are going through the same supplier: Cami Warren. Future projects should
coordinate requisitioning of all E&I materials using the same material stock codes (i.e.,
commodity codes, material reference numbers, etc) for the same electrical and instrument
bulk items (i.e., wiring, cable, conduit, etc).

Surplus Management:
Inaccuracies and problems in DMCS data and reporting have resulted in limited surplus
management capabilities. The surplus management procedures need to be built into the project
materials execution plans and integrated into the EPC work processes and systems in order to be
successful.

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Traffic and Logistics:

The Vehop project experienced significant and numerous delays and problems in traffic, freight
forwarding, customs clearance, and logistics. This was largely a result of poor planning and lack
of experienced personnel in these areas at the beginning of the project. The more significant
lessons learned include:
Budget and utilize experienced and professional traffic coordination team that understands
the Venezuelan processes, import laws and duties (CAU). Vehop originally budgeted for 4
people and ultimately required 14.
Include budget and resources for additional work and costs associated with non-CAU
imports.
Add liberal contingencies to the project bulk quantities when submitting for CAU approval.
Equipment and material must be inspected as it comes off of the ship. Otherwise it is
impossible to determine when the item was damaged and file the claim to the appropriate
party.
Train for and utilize the project materials system for traffic. DMCS was not utilized for
traffic info on Vehop. Utilize computer interfaces with freight forwarders to be able to
monitor and status materials during shipment.
Plan for and coordinate shipments to ports other than the project CAU port to expedite
customs clearance.
Assign traffic coordinator to freight forwarders location to expedite and coordinate flow of
materials, data, and paperwork.
Develop plans, procedures, and team building for traffic personnel to ensure good
communication between HO / freight forwarder / Port offices / Site.
Project Traffic Manager should be over all aspects of logistic operations.
Consider integration of "Harmonized Code System" which is utilized in Venezuela customs
clearance documents into the project materials management system.
More than one customs broker should be available for large projects.
Steel Fabrication:
Vehop utilized three steel fabricators, CTIW, Cives, Pellizzari and VHICOA. Early in the
project, the tagging requirements were changed from the CTIW standard process. As a result,
CTIW was unable to use bar coding and electronic receiving was not available for the project.
This made the receiving and control of structural steel a lot more complicated than it needs to be
and resulted in delays and problem resolution issues.

Purchasing:
Project procurement procedures, agreements, and purchasing formats need to be developed early
in the project to coordinate the purchasing requirements across all locations.

Warehouse and Site Material Control:

Poor up-front planning and lack of experienced materials management personnel contributed
significantly to delays and problems in receiving, storing, locating, and issuing materials.
Lessons learned include:

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A materials management team of experienced expatriate personnel is necessary to

successfully plan and manage the site materials operations.
Ensure proper training and support for use of the materials management system.
The materials system must be in place and ready for use with all materials transactions.
Access to the warehouse and laydown areas must be secure and controlled from first
shipments forward. Location of warehouse in proximity to project gates and truck routes
should be considered to ensure security of materials and route traffic during deliveries.
Warehouse shelving needs to be sturdy enough to accommodate pallets and weight of
materials (Vehops is not!).
Grid system for material laydown areas should be planned and implemented early in project.

Sub-Contracts:
Vehop utilized alliance agreements for electrical, instruments, insulation, and mechanical
subcontracts. The jury is still out on the alliance agreement effectiveness, but the approach (or
some similar concept) does merit consideration.
The Alliance Agreements can be referred to as a lump sum price subcontract based on unit rates
and estimated quantities, with a FIXED Margin (15%) composed of profit, home office overhead
and contingency. The All in Rate used to derive the Lump Sum portion of the contract is
supposedly only composed of costs. After comparing actual reimbursed expenses versus the
progress based on the unit rates, any savings the contractor achieves belongs to him, overruns are
credited against his margin.
Ongoing issues and lessons to be learned:

The quantities defined in the original alliance subcontract were not very good. As a result
most subcontracts need to be revised to reflect the actual (current) quantities.
The Subcontractor can earn the margin for on-schedule, low cost efficient performance or
can be lost for inefficient performance and schedule overruns. In all cases, the Allied
Groups timely performance is taken into account. It is supposed to be like a team whereby if
one player does not play well, he can cause the whole team to lose. It will be hard to enforce
this concept in practice and could generate claims.
The alliance concept was created in part to avoid duplication of supervision, resources and
services and to generate corresponding savings, (e.g. First Aid, ambulances security services,
site general cleaning). However, only the First Aid has been provided as a general service, all
other services are being provided by each of the Subs.
Another savings were anticipated to come from the pooling of resources, such as heavy
equipment, provided and shared from a common pooled resources department. To date,
however, no equipment pool has been set up.
Contrina reimburses all Alliance Subs' expenses on a monthly basis, except for payroll, which
is on a weekly basis. Furthermore, the equipment and temporary facilities are "rented" based
on blue book value or other pre-agreed formulas. Also, the Subs are reimbursed for the
purchase of all the small tools and in return Contrina has a 50% interest in those tools, which
Sub can earn for good performance. Right now, the majority of Allied Subcontractor have
productivity below 1which means that their reimbursed expenses are greater than their actual
progress values based on the quantity of work accomplished multiplied by their All in Rate.
Consequently, they are likely to eat a portion, or in some cases their entire margin account.

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In a case where a Sub has no margin left, Contrina will reimburse all their expenses above
and beyond that Fixed 15% margin amount. This situation brings about the following
concerns:
It is impossible to accurately forecast the final total values of the Allied Contracts.
You must be very vigilant in approving reimbursement expenses. However, the workload
and staffing on Vehop only allows for spot checks & audits.
Some of these Subs have other jobs going on in the vicinity and it is conceivable that they
may include expenses unrelated to the Vehop project for reimbursement. This is
especially true of Labor since some of these subs have payrolls exceeding 500 people and
there is no way of knowing if these people are working inside the fence or not. The
Vehop project is just now installing a clock system to monitor the labor hours.
All rework and warranty work is the Contrinas responsibility. If the subs margin is wiped
out, Contrina will be responsible for any warranty work expenses.
Consideration should be given to tying any bonus payments to milestones.

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