08 Nov Hidden Cost, Investment in the Client’s Project
In EPC Projects, the story of weight value, progress, and invoice calculation never stops. It is almost impossible to satisfy everybody and, whatever decision gets made, someone will oppose it. In this post, we will look at the story from another angle which Contractors would like!
Generally, in the EPC project, the cost of the procurement is high and could get to 50% or even higher. To have more certainty in the completion of projects and to keep the Contractors motivated, Clients dictate in the contract that the procurement invoices will be paid after installation or commissioning! On the other side, the contractor does pay the vendors in different stages of the process e.g. 20% after the drawing submission, 50% after manufacturing, 30% after delivery. In other words, the contractor pays from their account to the vendors, and the Client pays back several months or even year(s) later. Therefore, it could be considered that the contractor indirectly invests in the Client’s Project without having any return!
To illustrate the process, let’s consider a project whose Procurement value is $200. As per the Procurement schedule, the contractor will pay the vendors at different stages according to the table below:
The Client pays back to the contractor one (1) month after installation or commissioning of the equipment, as per the following table.
To pay to the vendors, the contractor should either borrow money from a bank (with interest) or take the money from his account (lose interest)! The graph below illustrates the summary of the above two tables. The contractor will receive the $200 at the end of the project!
If the interest rate is 5% per year, then the contractor will pay $5.67 as an interest to the bank or will lose $5.67 of interest! The calculation for the interest is illustrated in the next table:
It means that the procurement process will cost the contractor $5.673!
Therefore, the questions are:
- Why should a contractor pay on behalf of the client and only be refunded several months later?
- Does the client pay this interest to the contractor once the job is completed?
- Isn’t this an investment without any return?
- If the acceptable profit margin of the contractors is 10%, due to this cost/loss it becomes 7.2%! Maybe if the contractor knew the profit becomes 7.2%, they would not have tendered!
- Is this a fair practice?
If you wold like to discuss about the concept and how does it could affect your company future, or if you would to have our experience in discussion with your client then contact us now: info@khonopc.com, refer to: https://khonopc.com.
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