Cost/Schedule Overrun in Mega Construction Projects

Cost/Schedule Overrun in Mega Construction Projects Dr. George Jergeas P.Eng Department of Civil Engineering University of Calgary

Who am I George F. Jergeas PEng • BSc Civil Engineering • MSc and PhD Construction Management • Professor of Project Management • Interests: Team alignment, avoidance and resolution of disputes, project performance and auditing

Agenda • Objectives • Introduction • Reasons • Planning and Execution phases • Lots of questions • Feasibility Study • Trend System • Auditing project performance • Some conclusions

Objectives • Analysis of our current practice • Not to blame anybody • Lessons to be learned • More questions than answers • Momentum for further discussions and collaborations • Provide some initial recommendations

Introduction • $1 Billion plus projects • 20 Mega projects executed in Canada • Husky’s Lloydminister Upgrader • Mobil’s Hibernia off-shore development • Petro-Canada Terra Nova off-shore project • Dow, Nova Chemicals, Syncrude, Suncor, Shell

Introduction • No major problems re quality, health and safety, regulatory and environmental • Projects running in excess of design capacity • Making huge profits • No unskilled or unprofessional conduct by APEGGA member or permit holder

Introduction • Excellent Safety Record • Shell Upgrader, Ft Sask. 6 million hours • Suncor Millenium, 5 million hours • Syncrude 4.6 million hours • Albian Sands/MRC Ft. McMurray, 3 million hours

Introduction • All have encountered significant cost/schedule overruns in range of 20 - 100% • Blame unfairly placed on workers

Introduction • “Delays Plague Terra Nova Oil Project …Troubles cause Petro-Canada Stock to Tumble … $1 billion overrun (50%) and 12 month delay”Calgary Herald-February 20, 2001 • Syncrude has unveiled the biggest cost overrun in the history of the oil sand, with its owners saying yesterday that its latest expansion will cost $7.8 billion-- nearly double the original estimate ….. More than a year’s delay from the original deadline …” Globe and Mail-March 5, 2004

Advances in Project Management • Availability of sophisticated computer programs for • Engineering design, project scheduling, cost estimating and risk analysis • Improved construction technologies and methods • Professional PM training is readily available • PM associations - forums for discussions

But, • Owners and contractors alike continue to struggle in successfully managing Mega projects • Resigned acceptance in the financial community • “Realistically … its just part of the business, when you do these big, complicated engineering projects .. “ Gord Currie, Canaccord Capital Management, Calgary Herald, February 20, 2001

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

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

Reasons • Unrealistic Expectations • The original cost estimate and schedules are developed to ensure 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

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

Reasons • Unrealistic schedule • Poor project controls • Poor costing and budgeting practices • 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

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

Reasons • Lack of standardization and fit-for-purpose • Inadequate use of shop fabrication/ modularization strategy • Little or no constructability reviews • Poor communication and follow-up • Poor site organization leading to excessive time wastage • Inability to understand, plan, adapt, implement procedures or systems

Mega Project Challenges • Small vs. Mega project • Overrun on small projects are not recognized • 50% overrun on $100K • 50% overrun on $4 billion • 20 - 100% range equates to hundred of millions of dollars, in supplemental funding and foregoing many months of productive operational activity

Mega Project Challenges • Define and schedule work for 10,000 people every day • Organize, order, store and retrieve 80,000,000 material items • Manage worker turnover that can reach 200% annually

Mega Project Challenges • On $2.5 Billion project • Engineering effort • 3.5 million manhours at a cost $100/hr • 40 - 50,000 design drawings • 10 - 20,000 vendor and shop drawings • Construction effort • 15 million construction hours • Labour force of 10,000 workers with a turnover of 30,000 people • Supported by 500 - 800 staff personnel

Mega Project Challenges • Field labour approx. 5000 manhours per million dollars of capital ie. 10 - 15 million manhours at $85 to $100 per hour. • If labour production is not carefully managed this could easily double as it has done historically.

Mega Project Challenges • The task of managing a craft mix of 10,000 workers working in pairs doing at least two different activities per day results in a never ending 100,000 individual jobs in a 10 day shift • Each job requires a combination of the correct, materials, location, access, tools, equipment, scaffold, safety, quality, rigging, consumables, welding, x-ray and many other inputs to allow the worker to get his job done. • This task belong to management which to date has not been able to plan, organize or execute

Mega Project Challenges • Job sites • Confusion • Insufficient use of tools, equipment, material, labour • Work instruction vague • Engineering not prioritized • Poor worker productivity • No predictability of costs and schedules • Quality and safety are achieved

Ripple Effects • Outsourcing • Engineering services and labour • New contractual strategies and arrangements • Lump sum v. cost plus • Supply of labour • Union vs. Non-union • Foreign labour

Investigation Needs • Study factors affecting project performance during: • Planning stage • Execution stage

Planning Stage • The front-end period up to the point of official endorsement (project sanction) to proceed, where AFE for full budget funding occurs, and contract ratification with a major EPC contractor for project execution takes place: 1. What accuracy of estimating and % of engineering definition? 2. How “Targets” are established? 3. How “Targets” are agreed to by the Owner and EPC contractor? 4. Suitability of methods employed?

Project Planning Stage 5. Are project cost-schedule targets reliable? How verified, by whom? 6. What basis is specified for required EPC definition to support project budget approval, schedule, and sanction? Who sets? 7. Are the required deliverables and performance expectations for work during execution stage clearly defined, understood, accounted for in the targets, and mutually accepted? Are exceptions noted & quantified for potential risk/impact?

Project Planning Stage 8. Are the cost-scheduling methodologies selected appropriate and capable of generating reliable targets given the level of scope definition & uncertainty? How reconciled? 9. Are scope uncertainties adequately captured & quantified for impact on cost-schedule targets? How done, by whom? 10. Are cost-schedule data representative of real-world conditions, given scope definition, and cost-scheduling methods employed? How applied/verified?

Project Planning Stage 11. How are contractor/owner cost estimates & schedules reconciled prior to execution? How are deviations resolved/accepted, and resulting targets deemed to be achievable? By whom? 12. Are cost-schedule upper thresholds established, and overrun tolerances identified? What risk management practices are put in place to protect project targets, the owner & contractor?

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

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

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.

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

The Feasibility Study • Not challenged aggressiveness of start-up and the production ramp up curves that follows start-up • 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

The Feasibility Study • It is not easy to determine just how seriously the project team take the concerns that are raised in the external reviews and respond to them. In some instances the concerns are not referred to at all and in others, while there is an acknowledgement of the concerns and the issues, there is only a comment that they are being addressed and that mitigating actions will be taken.

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!

Delays in Engineering • Before the production of construction drawings can be taken, a number of development steps must be completed: • 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

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

Delays in Engineering • Series of extensive, time-consuming reviews - by the engineering consultant and the owner before P&IDs are approved and the detailed discipline engineering can begin at earnest. • What is worrisome is that the PFD’s and P&ID’s Milestones are some of the first Milestones on the Schedule 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.

Delays in Engineering • This undoubtedly 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?

Multiple Choice: How do the PM react? A) Mechanical Completion and Start-up dates will be changed to reflect the delay in Engineering B) Mechanical Completion and Start-up dates will not be changed C) All remaining activities will be squeezed into a duration less than originally planned D) The overlap of Engineering with Construction activities will be increased

How do the PM react? Answer is B, C and D • All the remaining activities will be squeezed into less than originally planned, and it is likely that the overlap of Engineering with Construction activities will increase • Assuming the overlap in the original schedule was optimal, then the new overlap would be less than optimal. • This will almost inevitably bring inefficiencies into the execution process and likely cause additional rework, thus pushing the costs up and putting more pressure on the schedule completion dates.

Trend System • Normal practice is that all changes to the base (AFE) be documented so that the potential cost and schedule impact can be flagged and estimated. This gives the PM a series of snapshots as the project develops as to whether and to what extent time and cost may be affected. • History has shown that while the trends flag individual activity changes, they do not give the full picture.

Trend System (cont.) • In variably, subsequent project re-estimates and assessments indicate higher levels of cost variations than would be expected from the trend indications. • Trends are classified in four ways: • Design development • Changes to the estimate • Estimate Omissions • Changes in Execution Strategy

Trend System (cont.) • When a trend is raised, the originator has to indicate not only the estimated cost of the trend but the schedule impact of the trend on the activity being trended. • It is quite likely- especially in the first few months of the project- that the schedule impact resulting from individual trends would not change the Mechanical Completion and Start-up dates • PM can mitigate the delays, by adding people ...

Trend System (cont.) • However, the PM should regularly be assessing the cumulative effects of the trends 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

Cost Allowances and Contingencies. • To cover for design changes, material quantity increases • Historical and risk based • covers for money that is going to be needed, but cannot be allocated to specific activities or areas at this early stage • The PM should be “running down” the allowances and contingencies according to some agreed upon plan • The run down of the allowances should match the additional costs being identified through the trend process. • With the huge number of trends raised at this early stage, it may well be that the allowances are proving to be inadequate for additional costs being identified. • Warning signal to the PM that events are not evolving as expected

Industrial Capacity and Skilled Labour Availability • Feasibility studies usually underplay the skilled labour availability. • Claim that project would not be affected by labour shortages and project would fit neatly into “lull” between other projects • Slow reaction to Alberta Workforce Supply/Demand Forecasts - COAA • Increased labour cost associated with shift changes to make it more attractive to construction workers to come the job • Additional costs

Other Questions • Are Canadian market & Geography factors under-estimated? Are they unexpectedly influencing project outcome (e.g. remoteness, climate, terrain, operability, supply/logistics) • Are the availability& resourcing of skilled contractors, services, attrition, competing work opportunities? • Are project learnings being captured in the EPC market? What barriers to continuous improvement in the PM practices exit, in which areas, and why?

Cost/Schedule Overrun in Mega Construction Projects