Digitization of engineering and management in EPC projects is a costly process. Eventually, it will come to a crossroads, where business sustainability, profitability, and pricing strategy will take over in guiding the IT technology development, not vision or ideas.
At this point, digital engineering and management (DE&M) shall emerge as an ultimate replacement for conventional engineering with simple rules of pricing. They should be attractive enough for the company to grow and profit.
Intuitively, the native way of DE&M monetizing is Software-As-A-Service (SAAS). Its known pricing schemes include flat-rate, usage-based, features-tiered, per-user, per-active-user, per-feature, freemium, hybrid, etc.
As follows from the scheme names, the billing differentiators are user, click, transaction, time, and a mysterious feature hiding everything else. It may be the storage volume, the number of emails sent, the data processing algorithm, or extra report types. As a rule, features do not improve the core service quality but make it more user-friendly and scalable.
All these schemes are used in SAAS that aggregates and stores user data. Such SAAS is data-agnostic. As customers use SAAS for creating a product with a known price tag, we may say that SAAS is product-agnostic as well.
Moving from headcount or clicks to the end business profitability as the main indicator for pricing is a challenge never discussed by startups.
On average, they spend only 6 hours on their pricing strategy in the entire history of their business. Not surprisingly, the reason number one for startup failure is considered running out of funds.
Today we witness the rise of SAAS that generates data using artificial intelligence. The effect of data value and ownership on pricing cannot be disregarded any longer. Ditto for the data quality. Unlike better-quality products, which are priced higher, inferior-quality data costs nothing.
By definition, SAAS for DE&M is data generating. In this case, the mentioned above pricing schemes lead to their gross underpricing if we stay only with a user, click, transaction, or time differentiators.
The first reason lies in the nature of the EPC project. Its activities are not evenly distributed over time. As seen from the figure below, the activities peak is shifted to the project end. In addition, the inactivity span between projects may last months to years.
The second reason is a high level of project capitalization. What is apparently left for DE&M to optimize is labor expenditures. They are within 6 – 12% of the project costs. No room for breakthrough changes. (Actually, this shallow view disregards the fundamental relationship between the project team skills and the project budget, timetable, and quality. Budget overruns of 30 – 50% are not rare in desalination.)
These reasons lead us to an uncharted territory of SAAS billing where we should start from scratch – from the engineering features definition and pricing.
Engineering feature is fundamentally different from any other type as the aggregation of the features leads to a new quality.
For example, an SAAS-generated technical specification is a part, while a SAAS-generated quote containing the former is a product. If the quote wins an order, SAAS takes all the credit and hopefully, a percentage of the profit.
Generated data is not measured in gigabytes but in conventional categories of engineering disciplines. These categories form the vocabulary of the project schedule. The same language should be used for SAAS billing. It means that all the third-party out-of-the-box billing systems cannot be used without customization.
The named challenges of pricing may create an impression that a smart pricing strategy is even more important than the SAAS product itself. It is not as SAAS billing framework is just a plugin for DE&M.
What are the billing elements of this framework? Not surprisingly, they are similar to the ones used in conventional engineering practices.
In the water industry, they are driven by a simple rule: the lower the price, the higher the chance of winning the project.
Competitor-based pricing
This strategy is pivoted around tracking the competitors and keeping the price difference always negative.
A classic example of competitor-based pricing is the early days of Amazon.com when nearly any book it sold was priced $1 less than at the competitors'. They all disappeared with time.
EPC business is more sophisticated than online book sales. The competitor's prices cannot be found on the internet but can be reliably predicted. All the system integrators procure equipment from the same sources and work with the same subcontractors.
DE&M creates price differences at any point from bidding to operation, chipping out the project budget pieces.
As bidding is automated, its cost and duration become inessential. The costs of bidding for megaprojects are in the $US 1 – 4 million range.
EPC digitization automates engineering, management, procurement, inspections, and commissioning of the project. As a result, their percentage drops to 2 - 3% of the project costs.
Better engineering solutions as a result of digital twins' usage will lead to not less than a 5% drop in equipment costs or 2.5% in project costs.
As DE&M creates the FEED package with much higher accuracy, the contingency of the project may be kept 50% lower. This figure pares down another 5% of the project bid price.
The digital procurement platform of DE&M contributes most to the price difference. As it directly links the EPC contractors and OEMs, local agent fees shall be subtracted from the project costs. It is not less than 2%.
Digital procurement platform works with a much bigger number of bidders. It automatically leads to lower prices. My conservative experience-based estimate of a price drop is above 5%. It is translated into 2.5% of the project costs. Zero errors in procurement pare down another 0.1 – 0.3%.
Digital procurement and commissioning make the project delivery faster by 4 – 10 months. If the cost of money is 2% annually, the faster delivery may save 0.6% - 1.6% of the project costs.
Total project price difference hits 19.8%!
The winning price difference may be zero or even positive because bid transparency granted by DE&M boosts the customer's trust and biases.
The biggest drawback of competitor-based pricing is a lack of revenue prediction as this strategy is tied to the EPC tenders publishing. It is hardly controllable.
The EPC projects are unlikely to make SAAS sustainable.
To achieve sustainability the framework should be built for a value-based pricing strategy. It should go beyond the project lifecycle and focus on the products not present in the EPC basket.
The first is transparency. Customers are willing to pay a premium for the use of digital tools making the project transparent.
The second is advertising. An ad pops up on the screen after the process engineer retrieves or creates information on the specific type of equipment. Google can't do this, nor Facebook as they don’t have access to DE&M.
The third product is licensed resales of projects executed in the past. They may be used not only for do-it-yourself (DIY) projects, but for feasibility studies, and education.
The next product is open platforms for resales of used equipment and spare parts inventories. They are just plugins to the DE&M procurement platform.
The final product is digital simulators of the plant operation for personnel training. They are built upon the plant digital twins.
EPC billing plans
The first billing plan shall be simple. The plan selected by crenger.com includes only two options – free and enterprise. If both have the same functionality where the catch is? Remember that SAAS is a copyrighted data generator? The free option does not allow the commercial usage of data. In the enterprise version, the customer pays for a license. In addition, the latter option includes technical support.