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Turnkey Redefined

Engineering and construction firms adapt to a changing market.

Fortnightly Magazine - December 2011

with IPPs to provide plants on a BOT [build, own and operate, transfer] basis.

The fact is, many IPPs are more nimble than some utilities are, so utilities might seek an IPP to build a plant for them and transfer ownership at some point. Because if the utility has a power purchase agreement with the IPP, then it’s considered a debt. But if they own the plant, it’s an asset. It grows the balance sheet.

What utilities call a ‘turnkey’ contract means EPC with guaranteed performance and schedule. But in the legal sense, turnkey also includes financing, and that might in fact happen to some extent where owners might look to someone to come in at the start, finance it, build it and then transfer it immediately, or maybe to own and operate it for a period of time before transferring it. I don’t see any EPC companies being equity owners to any extent. It ties up their balance sheet, so they can’t use their equity for acquisitions, expanding the company, or growing staff. But I do see a third-party approach emerging that has a third party willing to finance and build the project, and then at commercial startup the utility will write one check and own the asset without having to work through all the in-betweens.

The key for the client is getting a competitive price in the market without taking on undue risk or price escalation. It’s an ideal time now in the market to build things, because the cost of equipment and material is very good, labor is available, and it’s easy to predict the cost of something you might be buying for a project a year or two from now.

In 2007 the market was going crazy and we had prices escalating by 20 percent in a matter of weeks. If you were putting a lump-sum number together, it was difficult to predict where cost would be. EPC firms were trying to be competitive enough to win the work, but also trying to protect themselves in an unpredictable market. Some of our customers stepped up and we worked with them to find ways to share the risk for volatile items, so we weren’t putting undue cost escalation estimates into the bid.

 

Fortnightly: What challenges do you see in staffing? Are you hiring today?

Eppinger, Fluor: Our home office clearly is growing right now. We’re hiring engineers. That’s partly driven by solar projects, both PV and CSP. Also our field work will increase in 2012, but we don’t always have to hire for that. A large majority of our engineering talent resides in our central operations, and they’re applied to the active projects and markets. More engineering talent is moving into the electric power area now.

We have the capability to draw people from different parts of the company, but sometimes we have a project where we need more specialized expertise and we need to bring in new people. Nuclear is an example of that. At times it can be challenging to find those people, but the vast