Outsourced Machine Engineering Projects Require Appropriate Bids

Fixed-Price Vs. Time-and-Material: Choose the Right Approach to Optimize Project Execution

By Dan Hebert, PE, senior technical editor

As a machine builder, you’re generally tasked with two types of projects. One is to build a new machine or substantially change the design of an existing machine.

As a machine builder, you’re generally tasked with two types of projects. One is to build a new machine or substantially change the design of an existing machine. The other is to install your machine or machines, often along with machines from other suppliers, to make all or part of a manufacturing line.

When you plan either type of project, one of your most important decisions is whether to execute the work in-house or with outside contactors. Years ago, I discussed this subject in a two-part column: “Outsource Your Engineering? — Part I” (http://www.controldesign.com/articles/2006/117.html) and “Outsource Your Engineering? — Part II” (http://www.controldesign.com/articles/2006/129.html).

This month we’ll assume that the decision has been made to go outside for help, so let’s look at the best options for executing projects with contractors, namely fixed-price or time-and-material (T&M).

The total cost is known up-front on fixed-price projects and the bidder usually makes schedule and performance commitments. But getting contractors to submit firm fixed-price bids is not always easy.

Let’s look first at machine design projects. Bidders must have detailed knowledge of exactly what the new or redesigned machine is supposed to do. Imparting this knowledge to bidders via a detailed scope-of-work document, so they can submit fixed-price bids, can be quite a chore. If the design can be accomplished in-house, that’s usually the best option. But if skills are needed that are not available internally, soliciting fixed-price bids from outside contactors could be the best way to go.

For example, a customer might require your company to provide a control system of its choosing for your machine. If your company lacks expertise with the customer’s preferred control system, then going outside for a fixed-price bid can make sense.

In most cases, the bidder’s scope of work will consist primarily of software development, so they will need a detailed scope-of-work document describing the control system’s functionality. In many cases, all or part of this document is available in internal documents such as machine operations and maintenance manuals.

After the machine builder buys and installs the necessary control system components on its machine, the contractor’s software can be loaded and tested on the shop floor. The software development portion of the project should be bid and executed on a fixed-price basis, but shop-floor testing might have to be priced on a T&M basis as the contractor might have to work around other startup and test issues when testing its software.

Let’s now look at fixed-price versus time-and-material for projects that consist of installing your machine along with machines from other suppliers to make all or part of a manufacturing line.

Much depends on project size and scope. In general, the smaller the project, the harder it is to get fixed-price bids, especially if the project is small and consists of many scope areas.

For example, if installing the machines will require relatively small amounts of demolition, building modifications, new concrete slabs, piping and electrical work, it could be hard to find a bidder with this wide range of expertise willing to do a relatively small project.

The best course of action in this case is to probably separate the work into different areas and have each executed by a specialty contractor. If the scope can be well-defined, then fixed-price is the way to go. Pouring a new concrete slab is a good example of this type of work as the calculations and drawings needed to design the slab can often serve as the bid package.

If defining the scope is more challenging than actually doing the work, then T&M makes more sense. For example, routing and installing interconnecting piping among machines often is best done on-site via field routing with machine-builder personnel directing hourly workers.

For capital projects that exceed $1 million, fixed-price is the best way to go, as costs can be more closely controlled than they can with time-and-material jobs. These types of projects typically will require an extensive and detailed contract between machine builder and customer. This contract can then be turned into a bid document, and it’s relatively easy to find multiple fixed-price bidders for large jobs.