Academic Analysis of Cost Overruns on Mega Projects

1. Academic Analysis of Cost Overruns on Mega Projects George F. Jergeas P.Eng., PhD Project Management Program University of Calgary

2. Defining Mega Projects • Cost > $1 billion plus • Significant interfaces • Many players with different interests • Issues & risks must be managed at a level above the project team • Fast tracked

3. The Big Picture AFE 1 2 3 4 5 PHASE 2 SELECT from Alternatives PHASE 3 DEVELOP Preferred Alternative PHASE 4 EXECUTE (Detail EPC) PHASE 5 OPERATE & Evaluate PHASE 1 IDENTIFY & Assess Opportunities Operate Asset Monitor & Evaluate Performance Identify New Opportunities Clearly Frame Goal Test for Strategic Fit Preliminary Overall Plan Preliminary Assessment ~1 % Engng. Phase 1 Estimate Generate Alternatives Preliminary Development of Alternatives Develop Expected Value Identify Preferred Alternative Phase 2 Est. Fully Define Scope Develop Detailed Execution Plans Refine Estimate Submit Funding for Approval ~25 % Engng. Phase 3 Est. (+/- 10 % Accuracy) Implement Execution Plan Min. Changes Finalize Operating Plan Business Plan for Phase 5 Project Review AFE = Appropriation For Expenditure

4. Why Do Mega Projects Fail? • Unrealistic estimates? • Lack of governance & accountability? • “Appraisal optimism”? • Is delusion necessary for projects to proceed? (re. Flybjerg: Mega Projects & Risk) • Flawed execution plan? • Owner role not performed effectively? • Poor contractor performance? • Doing what we’ve always done (and expecting better results)?

5. Estimating Costs & Risks

6. Reasons • Size of the project • Many resources required • Complexity of projects • Technological complexity • Executed by virtual teams • Project organization structure • Multiple owners that do not share same culture

7. Reasons • JV of Project contractors and engineering firms are not aligned • Different cultures • Need to ensure that their own responsibilities are executed as well as possible • May be at the expense of the overall project

8. Reasons • Unrealistic Expectations • The original cost estimate and schedules are for project sanctioning, not to provide a realistic goal for the project teams • Poor/incomplete scope definition i.e. inadequate front end loading • Poor quality/overly optimistic cost estimates

9. Reasons • Contracting strategies • Not appropriate for the situation • Project control • Nobody has single point responsibility except the client who does not control much of the work • Underestimation/under appreciation of project complexity • Inadequate plan of execution

10. Reasons • Unrealistic schedule • Poor project controls • Poorly defined tasks and division of responsibility • Lack of knowledgeable leadership in E, P, C, Start-up of major facilities • Inexperienced/poorly equipped project management personnel and supervisors

11. Reasons • Shortage of skilled labour and lower than anticipated labour productivity • High labour turnover • Changing customer requirements • Lack of understanding the costs of changes

12. Reasons • Poor communication and follow-up • Poor site organization leading to excessive time wastage • Inability to understand, plan, adapt, implement procedures or systems

13. The Feasibility Study • A very comprehensive document • Considerable amount of work to scope the project, select the technologies to be used and present a business case • Lots of time and effort: • What Owner wanted to do • How much it would cost • What the economics of the investment would be and • What the risks might be

14. The Feasibility Study • No sufficient level of detailed work done to achieve the level of accuracy and confidence that the owners decision makers place in it when a project is approved • To achieve a level of accuracy of the estimate of 10-15%, we need a 30% engineering completion • The right 30% - not just any 30% • in particular considerable technical information/ engineering is required from equipment vendors

15. The Feasibility Study • Limited input from Operations • May be unknown at this time • Operations input is invaluable when considering: • Plant and equipment layout • Equipment selection • Determining the ongoing operations costs and staffing needs • Laying out the pre-commissioning and commissioning requirements and costs, start-up and early production projections.

16. The Feasibility Study • Downplays or overlooks Organizational Performance - both at the Joint Venture level and at the Project level • New companies with new and unproven technology in industry new to partners • Complexity on complexity • Benchmarking and Risk Analysis services • External reviews • Several concerns are usually raised • Cost and schedule projections are not aggressively challenged

17. The Feasibility Study • Not challenged aggressiveness of start-up and the production ramp up curves • Optimism and a lack of meaningful operations input contributes to false hopes on the part of the owners • Overlooking potential impact of new technology and the inefficiencies and problems that could result from a new joint venture and sometimes new players

18. The Feasibility Study • How seriously the project team takes the concerns that are raised in the external reviews and respond to them? • Not referred to at all • Acknowledgement of the concerns and with a comment that they are being addressed and that mitigating actions will be taken.

19. Delays in Engineering • Early delays in achieving key milestones such as: • Substantial Completion of Engineering • Freezing Process Flow Diagram’s (PFD’s) • P&ID issued for design • Delays do not seem to be reflected on final project completion date • Fast-tracking the fast-track!

20. Delays in Engineering • A number of development steps: • Production of PFDs - show the logic of the various chemical steps that will be used in the new facility. • The quantities of each of the process streams will be shown • Review and approval of owner before the next development step is released

21. Delays in Engineering • Develop the Process and Instrument Diagrams (P&IDs): • Identify all the pieces of equipment required for the process to work • Identify all piping required together with identification number, size, wall thickness and metallurgy, valve locations and type as well as control logic and hook-up • P&IDs contain critical engineering detail that must be agreed upon before the construction drawings can be started

22. Delays in Engineering • Series of extensive reviews before P&IDs are approved and the detailed discipline engineering can begin. • PFD’s and P&ID’s Milestones are some of the first Milestones and it is only once they have been reached that succeeding activities can be started. • In fact the Engineering build up can only take place once these early Milestones have been achieved - hence their importance.

23. Delays in Engineering • This would put pressure on the completion of the succeeding activities. • The delay in Engineering can also be caused by: • Additional work by the steady stream of trends • Either adding to original scope or requiring work already completed to be re-done • Slower build-up of the engineering workforce than planned • Lower engineering productivity than expected • Whatever the reason(s), how do Project Managers react?

24. Trend System • Changes to the base (AFE) are documented so that the potential cost and schedule impact can be flagged and estimated.

25. Trend System (cont.) • When a trend is raised, the originator has to indicate not only the estimated cost but the schedule impact of the trend. • Early trends would not change the Mechanical Completion date • PM can mitigate the delays, by adding people ...

26. Trend System (cont.) • PM should regularly be assessing the cumulative effects on the overall schedule. • As the number of trends climbs, one thing is certain - more work and more costs are being added to the project, and more hours must be spent before the project is completed. • This means that either the end dates slip or the additional work identified will take away from the flexibility that was originally in the schedule (if any) thus making the probability of achieving the schedule less likely

27. Cost Allowances and Contingencies. • To cover for design changes, material quantity increases • Historical and risk based • The PM should be “running down” the allowances and contingencies according to some agreed upon plan • The huge number of trends raised at the early stage of a project can provide Warning signal to the PM that events are not evolving as expected

28. GOLDEN RULES FOR AN UNSUCCESSFUL PROJECTS

29. NEVERprepare a realistic cost and schedule estimate

30. Project Estimate • NEVER provide a good quality cost estimate • Underestimate/under appreciate project complexity • Make sure the final completion date is cast in stone • Be optimistic and any delay during front end or engineering will be absorbed by construction!

31. NEVER conduct a sufficient Front End Planning

32. Front-end Planning • NEVER define the scope of work properly • Highly schedule – driven • Push everything to construction • NEVER develop alternatives and then select the best alternative • NEVER make clear what is in scope and what is out of scope • NEVER consider a proper risk analysis and management with contingencies for both Tactical and Strategic risks

33. Strategic Risks • Global Risk Examples • Broad political uncertainty such as country and regional instability or changes of government • Product Market issues that affect the spread between production costs and product price • Project Market issues that affect product and service availability or pricing for project • Public opposition • Global and regional economic trends

34. Strategic Risks • Enterprise Risk Examples • Quality of Project Delivery System- (Governance, People and Systems) • General business provisions that limit choice or action • Partners and issues above the project • Issues with the local government • Organizational alignment on project goals • Scope - (Does the project as represented to the project team identify every element that will eventually be required?)

35. Tactical Project Risks • Definition – (Degree of scope definition in relation to stage of project) • Contracting strategy effectiveness • Front End Loading effectiveness • Issues with compliance with local government laws / requirements • Effectiveness of Management of Change • Materials identification and management • Logistics risks • Procurement (pricing) risks • Engineering Productivity and schedule adherence • Construction Productivity and schedule adherence • Site – related risks

36. Categorize Project Risks to Better Understand Them Authority / Accountability Management • e.g.: • Management intervention in PMT tactics leads to internally driven risks • e.g.: • Political • Global economic trends • Partner / NOC issues • Organizational alignment • e.g.: • Project definition • Contractor performance • Pricing • Logistics • e.g.: • Unmitigated strategic risks become tactical problems for PMT PMT Tactical Strategic Risk

37. NEVERdevelop an appropriate contract strategy

38. Contract Strategy • NEVER break the Project to Manageable chunks • NEVER select the right contractual arrangement and payment structure • Always adopt fast-track strategy • With Lump sum combination • On Mega Oil Sands Projects adopt a cost plus approach • ALWAYS ASSUME that: • Multiple owners share same culture • JV of contractors and engineering firms are aligned and set up to work effectively

39. NEVER apply a proper project control system re schedule, cost, safety, quality

40. Project Control • NEVER make clear who has single point of responsibility • NEVER freeze the design • NEVER worry about early warning signs such as number of trends, changes, consumption of contingency and project float • NEVER pay attention to interface management

41. NEVERpay attention to labour productivity

42. Construction Productivity • NEVER consider the following: • Labour relations and morale • Communications • Material • Equipment • Scaffolding • Subcontractors • Supervision and leadership • Overtime and acceleration • Workface planning

43. NEVERFAMILIARIZE YOURSELF WITH THE CONTRACT

44. ALWAYSASSUME • CONTRACT JUST LIKE OTHERS • MUST BE FAIR and reasonable

45. No Damage for Delay “The contractor shall not have any claim for compensation for damages against the owner for any stoppage or delay from any cause whatsoever.”

46. NEVERIDENTIFY SCHEDULE EFFECT

47. Never document delays and impacts Never request appropriate extension of timeNever make clear who pays for additional costNever make clear who pays for acceleration

48. NEVER QUALIFY YOUR CHANGE ORDER PRICE

49. ALWAYSALLOWOWNERTOASSUME PRICE OF CHANGE ORDERINCLUDES: • SCHEDULE EFFECT • IMPACT ON CONTRACT WORK • CUMULATIVE EFFECT • PRODUCTIVITY IMPACT

50. NEVER WAIT FOR WRITTEN AUTHORIZATION BEFORE PROCEEDING WITH A CHANGE