About seven out of ten industrial projects underperform in production, operability, and/or have significant cost or schedule overruns. Everyone working on the project, including the sponsors, want a successful, on budget, and on schedule project. There are thousands of reference projects that have been done in the past decade, yet why is it so hard to learn from experience?
There are many reasons, and I’d like to comment on a few of the key ones that are of heightened risk because of today’s environment. There is much material available on industrial project underperformance, and we have talked to many in industry, and unfortunately we hear painful stories too often. As a general background:
- Project complexity increases daily, with more difficult to reach resources resulting in a continual need to deploy new combinations of technologies, more difficult environmental regulations, more difficult community relations, etc.
- We have been through 15 years of an economic boom in the Global Industry, and even the slowdown blip in 2008 was just a short term 10 month bust cycle with one of the fastest rebounds of industrial activity in 2009. During this boom, the underlying cost structure for engineering and construction services has increased much faster than inflation. On a typical project in the North Sea, companies are having to pay $300/hr for mediocre quality engineering – mediocre since after 15 years of boom, engineering companies have been often taking on less and less capable staff in recent years.
- In boom times, many unhealthy projects still make money.
- For many years now, many owner companies have been shedding internal experts in the technical functions, and they try to offload work and risks to EPC(m) or other contracting firms. But much of the work and risk cannot be transferred from owner to contractor because they are structurally different. Owners make money from the capital asset and they can still survive a budget overrun. Contractors cannot afford to take any financial liability of an underperforming project. Many owners often try to offload their project management or technical work to the contracting firm, but this is can be problematic mostly owners and contractors have very different perspectives. Owner’s teams need to be able to provide enough business and technical direction, and also provide contractor oversight. When they struggle to do so because they don’t have the resources to do so, the whole project suffers. Owner companies also struggle with internal coherence between all their internal departments and managers when they don’t have enough project resources.
- Engineering and EPC(m) firms are always in search of the next project and don’t provide or develop enough long term continuity, R&D, productivity, or innovative support to the project over its entire life-cycle, or to the next project. These contractors cannot hold specialty resources or afford to invest in innovation. Engineering and EPC(m) firms are more service firms than total solutions firms – in part because this is what owner’s ask of them through the procurement process.
- Much of the supply base, where much of the innovation does happen, struggle to afford or acquire all the necessary expertise needed to develop reliable and cost-effective solutions.
And now the Global economic macro-environment has weakened, especially in Canada’s Energy and Resource sectors.
With today’s drop in energy and commodity prices, and a general shortage of industrial capital financing, industrial companies are slashing their technical and project teams and departments to reduce their operating expenses. Until mid-2014 or so, production was King. Now we see significant consolidations, downsizing, and a focus on industrial company survival. An overly-lean team without enough access to critical skills is going to make current and future industrial projects even more difficult to meet expectations, budget and schedule.
With weakened balance sheets, industrial companies are going to need successful projects more than ever.
Keys for Improvement
We need to do better and we can do better with an improved application of management, strategy, approaches, and more respect for the complexity of today’s industrial projects. While all key stakeholders have to improve, the greatest leverage is with the project sponsors. They control the highest level need, budget, scope, risk profile, etc., and so they have the largest leverage on the outcome.
- There needs to be a common understanding by both business and technical professionals on why there are so many issues with these projects, and going forward, how these projects should be developed, governed, and executed.
- The project team needs to have the right skills, adequate staffing levels, and then a robust training program on how to best manage and implement the industrial project
- The up-front design and planning work needs to be adequately funded and given enough time. A weak design and/or poor plan causes too many problems downstream when the activity and capital spend ramps up.
- The right contracting strategy should be chosen, and the overall team constructed in a complete way and consistent with the strategy. The owner’s team must have the right skills and do all the scoping, concept work, requirements development, and overall management that is typical of successful contracts. The contracting must be done so that the professional service firms deliver quality and get paid well enough for doing so.
- Experienced and systematic approaches to the:
- technical solution,
- process of doing the project,
- build and organization of the team
While the above roadmap seems obvious, the root cause of the problematic projects are issues in the above five points, in either the understanding, approach, strategy, or implementation. Furthermore, they have to be done well enough to the sophisticated level required by the complexity in today’s projects.
When owner’s companies become more open to a longer term value and improved partnering with the contracting firms and the supply base, it can enhance productivity and innovation from their products and services to the owner’s projects over the life of the asset. For example, engineering firms could provide more long term asset support. They have significant data on all the projects from the design phase, and can get operational data from the currently operating assets. Currently after the project build is finished, the engineering contractor moves their resources onto other projects (or if it is slow lets them go). The owner’s operating department of the asset struggle without the contractor engineering support, design models, people continuity, etc., and often the result is the asset does not operate to its potential. There can be a great business case to further optimization and operational improvements to the operating asset that could be turned into a long term support contract. Everyone wins.
We must change the way we do things for a better outcome, and the ways do exist.