A. Murali, Tecnicas Reunidas, Bengaluru, Karnataka, India
Procurement is highly important in capital projects. In the author’s experience, procurement managers and teams can easily lose sight of the big picture in their decision-making. In engineering, procurement and construction (EPC) projects, procurement plays a major role in the evolution of a project from the drawing board to the field.
If you think about it, procurement has the potential (arguably) to make the highest impact on cost, time and quality of a project—whether positive or negative.
One common practice in the commercial evaluation of vendors is selecting the final vendor solely based on purchase order (PO) value. Since this will be the cost booked in a project, cost-driven project managers and procurement teams often ignore technical differences—as long as they meet the bare minimum requisition specifications—in this crucial step of the contract award.
A healthier alternative is to shift focus from the PO value to cost of ownership, which is a more holistic approach to procurement that will benefit the project and the organization in the long run.
The difference between the two lies in the fact that cost of ownership, unlike PO value, considers the designed life of an asset. Factors such as operability, maintenance frequency and ease-of-access for repair services over the entire designed life of an asset have a cost associated with them the PO value often does not cover.
For example, consider a piece of machinery quoted by companies A and B. Both the offers meet the technical specifications provided for in the requisition and are deemed fit-for-purpose. Company A has quoted $100, while Company B’s final price is $115.
Now, conventional wisdom and practice suggest that procurement teams, considering other conditions being equal (like lead time for delivery) will award the PO to Company A. However, a deeper look at the two proposals paints a different picture.
Suppose Company A’s cheaper machinery has a track record of requiring expensive maintenance every 2 yrs, while Company B’s more expensive offering boasts a robust design with minimal maintenance expected over a 10-yr lifespan. Factoring in the cost of spare parts, possible downtime, labor and logistical complications, the $15 difference in upfront cost quickly pales in comparison to the cumulative cost of repeated repairs and lost productivity.
This is where the concept of cost of ownership comes to the forefront. By broadening the lens beyond the immediate budget line, procurement professionals can consider the asset’s total lifecycle cost. This includes acquisition, installation, operation, maintenance, and even eventual disposal or replacement. The evaluation becomes multidimensional, balancing technical value, operational resilience and strategic fit for the organization’s long-term goals.
Implementing a cost of ownership framework requires deliberate effort and cultural change. Cost of ownership means challenging the entrenched mindset that lowest price equals best value, especially in industries where asset failure or downtime have far-reaching consequences.
Additionally, embracing cost of ownership can foster healthier vendor relationships. Suppliers who focus on quality, support and innovation are incentivized to compete rather than being driven out by relentless price pressures. This encourages a market dynamic where vendors strive to offer solutions that deliver sustained value, not just a low upfront price. As a result, the organization benefits from improved reliability, reduced risk and, ultimately, better returns on invested capital.
While the allure of the lowest PO value (or what is also known as the ‘L1’ offer) is ever-present in capital procurement, it is the disciplined pursuit of true value—through a comprehensive cost of ownership approach—that distinguishes high-performing procurement teams. By looking beyond the numbers on a contract and considering the full journey of an asset within the organization, procurement elevates itself from a transactional function to a strategic partnership.
After all, the real measure of success is not how little you spend today, but how wisely you invest for tomorrow. HP
Aashish Murali is a Project Management professional with nearly a decade of experience in India, Malaysia, the U.S. and other global project locations in the areas of EPC project conceptualization, feasibility studies, investment analysis, front-end engineering design (FEED), detailed engineering, plan reviews, monitoring and control, procurement, logistics/supply chain, modularization and construction for oil and gas and chemicals industries. Murali currently works as a Project Engineer at Tecnicas Reunidas.