The process of handling an FLSmidth project
- from initial enquiry to final commissioning


From enquiry to contract

The geographical location of a cement project determines which of the four regional FLSmidth Project Divisions serves the customer. Each division has all the necessary resources within its region and maintains a clear line of responsibility from the initial contact with the customer to handing over of the finished plant.

When a customer approaches the regional FLSmidth division with an enquiry for a cement project, the Sales department will make an overall evaluation of the customer's expectations regarding the scope and production capacity of the project viewed against the raw material deposits and an assessment of all risks involved in implementing the project, including commercial, country specific, technical and contractual risks.

In connection with the risk assessment samples are taken of the raw materials to be used in the production, typically natural deposits situated close to the cement plant in question. The samples are shipped for technical and chemical analyses by the FLSmidth Process department. Based on the samples received, the Process department calculates the mass flow which helps to determine the dimensioning of the plant.

After the raw material samples have been examined and the sales engineer has drawn up a work plan, a meeting is held with the customer. At the meeting, the initial plans and calculations are discussed to make sure that the proposal to be prepared by FLSmidth matches the customer's expectations and needs.

The quality and properties of the raw materials determine the size and capacity of the main machinery. Once the calculations are finished, FLSmidth's Proposals department takes over the project. The geographical location and the climatic conditions are then studied in closer detail to determine, for example, whether a natural slope of the plant site or particular climatic conditions may be supportive of the production process. Then drawings are made of the plant layout and machinery configuration. Most of the machinery supplied by FLSmidth is of proprietary design. Minor machinery such as fans, material elevators and some types of filters may be provided by subsuppliers who at this point in time will receive enquiries for the machinery, if relevant. This part of the enquiry process is that which requires most resources within the organisation and it may take up to two months to complete.

The machinery configuration is then sent to the Cost Estimating department which calculates a price for the project. Factors that influence the price include FLSmidth's procurement of materials for the manufacture of machinery and customer requirements regarding place of manufacture and country of origin. The price estimate is submitted to the Sales department which sets the final price for the project.

Before the final tender is submitted to the customer, another risk assessment is made and FLSmidth's Legal department reviews all the contractual risks in the tender, for example arbitration requirements, if relevant; definition of 'acceptable production'; warranty period; compensation; rejection conditions; test periods; statement of obligations; security for payment of the project (prepayment and letter of credit); taxes and duties, etc.

A list of suppliers is attached to the tender. The Sales department and the customer must agree on the content of the lists before the tender price is finally fixed.

Major tenders must be approved by the Management before being submitted.

In some cases, FLSmidth will charge the customer for the work of making a proposal. This amount is refunded if the customer subsequently accepts the offer.

Negotiations
The customer will typically need 3-6 weeks to consider the tender, which contains two separate proposals: a technical proposal with out prices and a commercial proposal with prices. Often FLSmidth will be competing directly against 3-4 other international suppliers to win the contracts.

When the customer has considered the tenders and before making a final decision, a meeting is called to clarify technical issues. At the meeting the technical aspects of the project are discussed. This meeting is the most important part of the sales effort to win the project. FLSmidth presents its experience and considerations regarding choice of machinery and raw materials. The meeting often takes 3-4 days. The meeting results in a revised technical proposal in which FLSmidth incorporates the comments made by the customer. Once the technical issues are in place, negotiations start on the commercial proposal.

Typically, it will take longer to finalise the negotiations on the commercial proposal, from a couple of days to four months. At this stage, the financing of the project, usually undertaken by the customer himself, also needs to be finalised.

Financing
In some cases, FLSmidth will be instrumental in arranging financing via its network of national and international banks and financing organisations, including the Danish Export Credit Fund.

Generally speaking, there are two ways of financing projects, either project financing through local banks and financing companies or export credit or project financing arranged by international banks and financing companies. When choosing international financing, the World Bank environmental policies must be complied with.

In a few cases FLSmidth will participate in the project as a minority shareholder. This will be the case in projects which FLSmidth supports, but which for various reasons are having difficulties in being financed. FLSmidth's participation adds credibility to the project, something that would otherwise be impossible to obtain and which makes it easier to borrow money. This situation typically occurs in third world projects. There may also be other reasons why the customer wants FLSmidth to participate as a minority shareholder.

The key to a project becoming effective lies in a letter of credit being opened within a certain time after the contract is signed. The letter of credit must be issued by an internationally recognised bank or financial institution. The document is an assurance from the customer's bank that the customer will pay as long as FLSmidth complies with the contract.

When the letter of credit and various guarantees are in place, the contract is signed. This releases a prepayment. The prepayment typically amounts to 15-20% of the total project price. The prepayment is final proof that FLSmidth has landed a contract, and in the case of projects with a value exceeding 200 million Danish kroner, it is this payment that triggers a Stock Exchange announcement stating that FLSmidth has received an order.

From contract to handing over to customer
Based on the machinery configuration that was made by the Proposals department at the enquiry stage, the Engineering department now begins the mechanical and electrical layout engineering work. The layout drawings are produced on the basis of the layout plans made by the Project Department. These drawings show the power distribution layout of the plant, cable routes, distribution panels, motors, instrumentation, control systems, etc.

The original machine drawing is then revised because it is now decided which auxiliary machines are to be used. This leads to the final machinery specifications. FLSmidth's machine specialists in the engineering departments are responsible for these specifications. They are a very detailed document that describes everything needed for the project, right down to the smallest nut and bolt. A parts list is also drawn up showing who is responsible for the various parts. The whole process ends with a purchase specification.

Procurement, inspection and despatch
The Procurement department sees to all procurement for the project. The complete purchase specification for a typical project contains approximately 5000 items that must be produced by/purchased from suppliers.

Once an order has been placed and an order confirmation received from the supplier, the order proceeds to the Expediting department and to an inspector. The inspector's job is to check the quality of the machines and he will therefore visit the workshops and foundries that are supplying to the project in question. When the machines are finished, the inspector checks whether the order matches the packing list which must accompany the machines when they are dispatched. Once the packing list complies 100% with the machinery, the Shipping department takes over and sees to the transport from the workshop to the port of departure. Shipping handles all the practical work in connection with transport, and in the case of projects supplied on Free on Board (FOB) terms, their responsibililty ends when the goods are onboard the ship.

In turnkey projects, however, shipping responsibility does not end until the goods have been delivered at the construction site. When the goods arrive at the destination port, Shipping sees to it that they are stored in a duty-free warehouse before being carried to the construction site.

Each dispatch of goods releases a payment. In practice this means that the customs papers and documents that accompany the goods under the letter of credit are handed over to FLSmidth's bank which then collects the money from the customer's bank. Consequently, for each shipment a payment is received and the letter of credit is written down accordingly.

It usually takes 10 to 18 months from the contract is signed until the goods have been delivered and are ready for installation.

Installation and commissioning
From this point and until the plant is operational and ready to be handed over to the customer it usually takes another twelve months or so.

In FOB projects the customer himself is responsible for installation and construction of the cement plant. However, FLSmidth provides supervision for the installation of its own supplies.

In turnkey projects FLSmidth is also responsible for construction and installation work.

When construction of the plant is finished, the running-in process starts and FLSmidth will then assign commissioning specialists to the site. These people are responsible for testing the plant to make sure that it works and produces in accordance with the specifications. It will usually take 3-6 months to run in the plant.

The commissioning manager's duty is to ensure that the plant complies with the performance guarantee issued to the customer. The performance guarantee covers emission, power and fuel consumption (oil, coal, gas and waste, if relevant) plus output/performance. The guarantee only applies to parts that are not subject to wear and tear and usually remains valid for one to one and a half years after the plant came on stream.

Handing over
When the finished product is handed over to the customer, the latter will sign a so-called Final Acceptance Certificate which closes FLSmidth's legal obligations towards the customer. FLSmidth however, takes pride in the fact that the plant will continue to function 20 or 30 years after being commissioned – provided it is operated as prescribed.