Industry Challenges EPCOM is Addressing
Most successful contractors want to do ever-larger projects. Opportunities for larger projects are increasing. From whatever size a contractor is used to performing, to be successful, larger projects often require improved planning and integration of owner project definition, engineering, procurement, construction, operations and maintenance. Larger projects also generally experience greater risk with associated quality, cost and schedule control challenges.
In the heavy industrial sector, from the client’s perspective, most projects, from small to mega, fail to achieve client objectives (routinely exceed client budgets by over 25%, and/or fail by similar schedule and competitive measures). Further, insufficiently-addressed quality/operability issues are appearing much too late in the delivery process, resulting in defeating losses in economic viability and decreasing client ability to remain agile during market swings. Extensive industry data shows lack of effective project control on the vast majority of major projects. The opportunity to improve is clear, profound and present. How to do so is the difficult issue for most companies.1
Improving project (small/medium/large/mega) performance reliability for mutual benefit of stakeholders, necessarily requires improving work processes used by those stakeholders, especially at the interfaces between associated departments and between company stakeholders. Project setup for success is primarily the owner’s responsibility. Contractors cannot effectively replace many key owner functions.
Industry data shows that reliability of project performance (small/medium/large/mega) can be profoundly improved (>25% cost and schedule) by aligned, robust implementation of industry best practices. Many companies have experienced significant improvement by such initiatives.
However, according to Independent Project Analysis, even for industry leaders, notwithstanding consistent use of the best practices currently defined by the industry, 16% of projects continue to overrun cost by more than 10% and 2.5% of projects overrun by more than 20%.2 In his new book “Capital Projects,” Paul Barshop says only 60% of finished projects actually meet all objectives after the project is complete and the asset was put into service, and that the average project delivers 22% less NPV that what was forecasted when the project was funded.3
Notwithstanding the outcome of using current best practices are so limited, a major industry consultant recently called it a “fool’s errand” to pursue further reliability increase. Further, it is useful to consider that although profit is generally limited by competition, loss, however, has no such boundaries. Facing 26% of projects with profound losses, can and often does, more than offset the profit on many successful or marginally-profitable projects.
The industry’s current inward focus (assuming the best work process and control being done is the best that can be done), is limiting. It is important to build a foundation for performance by diligently extracting and implementing well-vetted industry best practices with governance. But clients, EPC and supply chain members should not resign to such losses or their impact on short and long-term profit. It is important to enhance industry best practices with ultra-high reliability methods used in other industries on projects throughout the developed world.
Additionally, the heavy industrial sector continues to be challenged with a low level of workforce training in advanced work processes or leadership of rapid improvement, rules and tools. There is plenty of opportunity to improve supporting college curriculum breadth, depth and accessibility and professional development opportunities for continuous improvement-minded professionals. The industry needs to pursue on-demand availability of this expertise.
1 Nandurdikar, Neeraj, IPA, Presentation to Purdue EPCOM Board of Directors Meeting, May 25, 2016
3 Barshop, Paul, “Capital Projects: What Every Executive Needs to Know to Avoid Costly Mistakes and Make Major Investments Pay Off,” ©2016, Pages 3 and 7