PSE&G Howell Street substation
the example of a successful turn-key utility project
All modern utility companies have experienced a shortage of finding a qualified internal workforce so they look for staff augmentation through outsourcing. This paper details how the Public Service Electric & Gas Company (PSE&G) of New Jersey used a “turnkey” approach to build the new 13/4 kV Howell Street substation. Topics discussed include expectations versus realities, problems discovered and solutions developed, lessons learned, etc. These topics may be help others be more successful in their own turnkey projects.
One of the biggest challenges faced by the modern utility industry all over the world is a lack of qualified in-house resources. When an experienced member of the workforce retires, it is difficult to find a replacement. The main reason is the loss of attractiveness for new employees to work for a utility company (electric, gas, etc.) because of the companies continuously cutting on benefits, pay, pension, etc. So, long gone are good old times when utility companies could do all the work by themselves, relying on the internal engineering, design, construction, and project management resources. There is more work than 10 years ago, and a less qualified workforce to do it.
As a result, a common trend in the modern utility industry is outsourcing. One of the most popular project delivery options based on outsourcing is a “turnkey” or “design-build” or “Engineer, Procure, Construct (EPC)” approach where the owner (utility company) hires the outside contractor to perform a certain work (e.g., construction of new or modernization of existing facilities), covering all project phases: design, construction, testing, commissioning, etc.
Ideally, the owner should decide what the company wants, get a contractor to implement this wish, and then take the final product and use it. However, it is never that simple. Successful outsourcing requires a specific experience that most companies do not have. As a result, they may have unfulfilled expectations about the quality of the delivered product, cost, schedule, etc. There are many typical obstructions that should be overcome by both the owner and contractor to make a turnkey project a success.
To make this learning process shorter (hopefully) for others, Public Service Electric & Gas Company (PSE&G) of New Jersey wants to share its experience in a successful application of a turnkey approach for the new 13/4 kV Howell Street substation. Their experience includes lessons learned, problems discovered, and solutions developed.
In 2003, PSE&G celebrated its 100th anniversary. Since it has been in business for that long, it has a number of buildings and facilities that are 50 years old or older. These facilities are still serving customers, but they need to be replaced or upgraded. The old Howell Street substation was one of these facilities. Built in 1952, it had obsolete equipment that was prone to failure. Exhibit 1 shows the old Howell Street substation.
Exhibit 1: The old Howell Street substation
When a road-widening project in the area required relocation of a Howell Street substation, a decision was made to build a new, state-of-the art facility on available PSE&G property. It required the company to switch load from the old station to a new station and demolish the old facility. Because of the apparent simplicity of the task, lack of interaction with any other facilities, and its relatively small size, the project was considered to be a good candidate for a turnkey approach.
To start the process, a request for proposal was sent to several reputable turnkey vendors. It included a specification describing the new substation’s arrangement, equipment characteristics, approved vendors to procure this equipment from, as well as a one-line schematic and conceptual arrangement drawing. The overall scope included a 13/4 kV substation consisting of three incoming 13 kV circuits, two 13/4 kV 6.0 MVA transformers, and seven outgoing 4 kV circuits. The control systems included state-of-the-art microprocessor relays and instruments. After being energized, the new substation was supposed to provide power supply to about 1,500 industrial and residential customers in Jersey City, NJ.
After lump sum bid proposals were received and evaluated by PSE&G personnel, a purchase order was placed with the successful bidder to build the whole substation in 18 months, which was acceptable because a road-widening project was scheduled to start in two years. The rest of the story is presented as a list of owner’s expectations, realities, and lessons learned, that covered various areas of the project.
1. Expectation: Because this is a turnkey project, involvement of PSE&G personnel will be minimal.
Reality: In order to ensure acceptability of the final product, the project had to be closely monitored by PSE&G engineers, designers, construction supervisors, etc. during the whole project life cycle, which resulted in significant additional personnel time spent. This extra time amounted to almost 50% of the time that would be needed if the owner did all the work.
Lesson Learned: Turnkey does not mean “free from the owner’s involvement.” The project budget should include sufficient funds to cover the owner’s effort to support the project. Depending on the nature of the project and previous experience with a particular turnkey vendor, these extra funds may be higher or lower, but they are always needed.
2. Expectation: The company’s technical requirements are pretty standard, they are not different from what other utility companies want. For a straightforward substation project, a decent specification explaining major requirements should be sufficient for an experienced turnkey contractor to provide a quality product.
Reality: The range of possible technical solutions for the same project is very wide. While all of them are safe and working, PSE&G operational and maintenance personnel are very strict in their specific requirements on how things should work and will not accept anything that deviates from their practices, including a turnkey vendor’s interpretation of the initial specification’s requirements. This problem was discovered during design reviews and rectified, but the solution came with a hefty price tag, because the vendor’s original bid proposal was based on the vendor’s understanding of the owner’s wishes. Anything that was not spelled out in the specification but requested by the owner later led to change orders and additional expenses. On this particular project, a total of 12 change orders were issued, with a total cost about 30% of the original bid price. The majority of these change orders was a result of the differences between what the owner meant, and how a vendor understood the task.
Lesson Learned: The owner’s specification should be very thorough and state all the requirements, even if they are minor. It should include the operation and maintenance personnel’s input as well. Any extra time spent to make a request for proposal clearer will pay off eventually by reducing the amount of future change orders.
3. Expectation: It is easy to manage time and cost for a turnkey project:
- Completion date is guaranteed by the vendor
- Final cost is easily predictable, because there is a lump sum contract with the vendor.
Reality: Any changes requested by the owner will lead not only to a cost increase to cover change orders but to possible delays as well, because a vendor based the schedule on a different scope.
Lesson Learned: Contingency funds and time buffers should be included in a project budget and schedule respectively to compensate for a possible cost increase and time delays for a turnkey project. In the case of the Howell Street substation, PSE&G created a financial reserve in the amount of 30% of the base budget, and a six-month long time reserve anticipating surprises in their first turnkey experience. Both of these measures proved to be critical for a successful project.
4. Expectation: It is easier for the utility company’s project manager to manage a turnkey project, because this person is dealing with a single point of contact—a vendor’s project manager.
Reality: While spending less time on cost, time, and communication management, the owner’s project manager is getting much more involved in scope and contract management, because of a necessity to control and monitor the vendor’s performance, adherence to scope, change order requests etc. By no means does the owner’s project manager works less in a turnkey environment than in the past. This project manager just has additional, new responsibilities, which in many cases may require an additional learning.
Lesson Learned: The utility company has to provide a strong project manager to support turnkey projects to ensure that the owner’s interests are protected. If the personnel is lacking knowledge and experience in the specific areas critical for a turnkey project management, adequate training should be provided.
It took almost two years for PSE&G to have its first turnkey project completed. There were some completely unexpected delays. For example, after a vendor finished pile driving, PSE&G construction personnel raised the concern about the quality of work performed. The only way to address this concern was to test some piles randomly. Testing proved that while the type of piles chosen by the vendor and the technique used to drive them differed from PSE&G practices, a quality of work was acceptable. Unfortunately, work was stopped for two months while pile testing was performed, which led to delays and additional expenses.
Another unexpected delay was associated with a ready for service substation’s acceptance by PSE&G maintenance and operational personnel. At least four pre-energization walk-through meetings were conducted to address the continuously raised concerns and punch-list items. However, eventually the substation was accepted and energized. The final product is shown in the Exhibit 2. After the new station was placed in service, the old one was demolished.
Exhibit 2: The new Howell Street Substation
Overall, the first PSE&G experience with a turnkey project was successful. A new substation was placed in service, and the old one was demolished before the start of a road-widening project. The full project scope was implemented while the total cost remained below an approved budget. Therefore, the classic “triple constraint” (Project Management Institute [PMI], 2004, p. 378) was fully met. Besides that, PSE&G obtained valuable experience in using a turnkey project delivery approach. All the Howell Street project lessons learned should make any future outsourcing experience even more rewarding.
Another benefit from the work on the Howell Street project was an opportunity to establish good working relationships with a turnkey vendor who received more knowledge about PSE&G’s engineering and construction standards and practices after completing his work on the project. As a result, this vendor was successfully used by PSE&G on several more projects and remains to be one of a few “vendors of choice” for a future turnkey work.
Project Management Institute. (2004). A guide to the project management body of knowledge (PMBOK® Guide) Third Edition. Newtown Square, PA: Project Management Institute.
© 2008, Boris Shvartsberg
Originally published as a part of 2008 PMI Global Congress Proceedings – Denver, Colorado, USA