Risk mitigation and improved predictability in capital projects

An Industry Insight feature with Ulf Danielsson of Pharmadule

“From a corporate perspective the design-built modular approach is really interesting since it firms up the capital investment at the start of the project and minimizes the financial risk”
-Ulf Danielsson of Pharmadule

Despite the current financial crisis and the increased cost and regulatory pressure on the pharmaceutical industry there is a continued need for capital investments. New products need to get to the marketplace and they often require new or updated manufacturing facilities.

Under the current circumstances, where the industry is under a tremendous cost pressure and the weaker product pipelines demand that new products are launched smoothly, the need to control cost and lower risk in capital projects becomes even more important.

Today most projects are delivered the conventional way as Engineering, Procurement, Project Management and Validation (EPCMV) projects. The phases of the project are often competitively bid between contractors where the owner is searching for most cost-effective supplier for each phase. Once a contractor is selected it is tightly managed make it keep within the limits of the original budget.

However, most contractors are operating on a cost reimbursable basis. This results in an open ended project from a cost perspective. One approach to reduce the risk of an open ended contract is to set up a guaranteed max value or a shared cost risk to control the budget. Most contractors are reluctant to commit to this, especially in the early phases. This makes it more difficult for the owner to predict the final cost at an early stage.

Bidding each phase might put the project delivery schedule at risk. The bidding process itself is time consuming and with hand-over to new organisations there are great risks that time is lost. The use of design-built contractors with modular delivery methods approaches will assist to mitigate cost and schedule risks. This gives the owner a drastically reduced financial risk with an improved predictability of the cost and the delivery schedule.

Design-built means that one company designs and builds the facility. This eliminates hand-over and a design-built contractor often works with an integrated team spanning all phases of the project, from design to qualification. The modular approach means that the project is designed as modules and fabricated off-site in a workshop. The modules can be anything from process equipment units, pipe racks or clean room partitioning to complete building segments with everything installed. Fabrication in a workshop leads to an improved quality since the work is performed under controlled conditions by workers that are specialised in building the modular units.

The fabricator also has much better control over schedule and cost compared to traditional site construction. Modular firms can often commit to a fixed price at an early stage which dramatically increases the predictability of the final cost and reduces the owner’s need to put project control people on the project and thus saving cost.

From a corporate perspective the design-built modular approach is really interesting since it firms up the capital investment at the start of the project and minimizes the financial risk. The predictability in cost and schedule allows the owner to avoid unpleasant surprises in the introduction of a new product.

The real benefit though is the reduction in delivery time that modular off-site construction offers. This is typically three to six months shorter than conventional deliveries but can be even more. This shorter time translates into lower internal costs and a lower internal rate of return. The shorter duration can be used to get to market faster which is of course almost invaluable when you are fighting with competition to get first with a new product. Alternatively, the shorter schedule allows you to hold off with the final investment decision for another few months, still meeting the same launch date. This will allow time for additional process development to be made or for clinical trials to better confirm the viability of the product. In this way the start of the investment can be deferred and the risk of building a facility is reduced.

Ulf Danielsson has more than 23 years of experience from the pharma and biotech industries currently holding the position as VP, Sales and Marketing at Pharmadule in Sweden. He joined Pharmadule in 1996 and has prior to that held various positions in Pharmacia Biotech (now GE Healthcare Biosciences) and Pall Filtration.