Industry benchmarking has shown a big gap in cost, schedule and operability between best and worst projects with a major impact on the total cost of ownership over the life of the asset. In today’s competitive business environment this can mean a difference between a profitable company and the one that becomes a takeover target.
This practical paper addresses management of limited and scarce capital resources for consistent world-class project performance. Topics covered in this paper include:
- Project Management’s Impact on the Bottom Line of the Company to improve Return on Capital Employed (ROCE) and Total Shareholder Return (TSR).
- Project Development & Execution Process which enables effective communication between Decision Makers, Multifunctional Project Team and Stakeholders.
- Project Management Best Practices that optimize Safety, Cost, Schedule and Operability of
- Total Cost Management tools to plan, schedule, estimate, monitor and report project progress.
Project Management’s Impact on the Bottom Line
Effective project management improves ROCE by increasing revenues, decreasing operating/maintenance expenses and reducing capital employed. ROCE is a common metric in the industry to measure capital efficiency.
Projects are the vehicle by which we turn business opportunities into valued business assets. Successful projects are defined as the ones that are delivered safely, on time, within budget and meet established business objectives. If a company selects and executes good projects on a consistent basis, it can increase revenues, decrease life cycle costs and use less capital to achieve its business goals.
Project Development & Execution Process
Figure 1 shows a structured Project Development & Execution Process which enables effective communication between Decision Makers, Multifunctional Project Team and Stakeholders.
The goal of Phase 1 is to identify and assess business opportunities and the key deliverable is to validate a business case to proceed. With the limited engineering conducted in Phase 1, the cost and schedule estimates at gate 1 have high contingency and wide accuracy.
The goal of Phase 2 is to look at all the alternatives including doing nothing, building a new asset, expansion of an existing asset, acquisition of a competitor’s asset or divestiture of the asset and the key deliverable for gate 2 is a preferred alternative. With more engineering conducted in Phase 2, the cost and schedule estimates at gate 2 have moderate contingency and moderate accuracy.
The goal of Phase 3 is to fully define the scope of the selected alternative and the key deliverable at gate 3 is a Final Investment Decision (FID) document for full funding of the project. With significant engineering conducted in Phase 3, the goal is to have cost and schedule estimates at gate 3 with +/- 10 % accuracy.
The goal of Phase 4 which includes detailed engineering, procurement, construction and commissioning is to implement the execution plan with minimal changes and deliver an operable asset to the operating organization. The root cause of cost overruns and schedule delays on projects in most cases is scope creep. There are two questions that need to be asked when changes come up in Phase 4: is it safe the way it is designed and will it work? If the answer to these two questions is yes, there should be no change!
The goal of Phase 5 is to operate the asset, monitor performance and identify new opportunities. Decommissioning and abandonment of the asset should also be part of this phase.
In order for this process to work requires active participation from decision makers, multifunctional project team, contractors and suppliers. Every project should have a sponsor assigned at gate 1 and that individual should be held accountable for the business outcome one to two years after project completion. This look back should address if the project delivered business results that were promised at FID.
Project Management Best Practices
Figures 2 and 3 show Project Management Best Practices that optimize safety, cost, schedule and operability of projects.
Project Management Best Practices in conjunction with a structured Project Development & Execution Process can help achieve World Class performance. Effective application of these practices can optimize safety, cost, schedule and operability of any project.
Decision and Risk Analysis (D&RA)
Building wrong projects less expensively is not much help! We want to select the right projects and execute them with excellence.
D&RA is a process to compare and decide among various alternatives by quantifying risks and uncertainties inherent in financial outcomes of the alternatives. Tools such as Decision Hierarchy, Strategy Table, Influence Diagram, Tornado Diagram, Decision Tree and S-curve are used to communicate most likely, optimistic and pessimistic outcomes of any decision.
Project Execution Planning (PEP)
PEP is a tool for strategic planning whose purpose is to maximize the probability of project success. Once a good quality decision is made using the D&RA process, the multifunctional project team should kick off the project with a PEP workshop. The topics covered in PEP workshops are:
Part A: Defining the Vision of Success
- Business Goals
- Project Objectives & Drivers
- Scope of Work
Part B: Defining the Strategy for Success
- Management Level Plan
- Risk Management Plan
- Organization Plan
- Contract Plan
- Best Practices Implementation Plan
- Team Performance Management Plan
Part C: Defining the Tools for Success
- Time Management Plan
- Cost Management Plan
- Quality Management Plan
- Safety & Environmental Management Plan
- Materials Management Plan
- Communications Management Plan
PEP is a living document that is kept current throughout the life of the project. It serves as an excellent source for communication between the project team, decision makers and stakeholders.
Construction Industry Institute (CII) Best Practices
Figure 3 shows a list of CII best practices. CII has shown the benefits of implementing these practices based on past completed projects in the industry. The optimum time for implementing these practices is during front end planning prior to FID and full funding of the project.
The goal of a peer review conducted by an independent team is to constructively challenge the project team’s assumptions, alternatives considered, decision logic and path forward. Peer Reviews are also an excellent mechanism to share lessons learned across the company.
Project Definition Rating Index (PDRI) tool developed by CII can be used at the end of Phase 2 and Phase 3 to determine if the project is ready to move to the next phase. Any gaps identified by PDRI should be closed prior to FID.
Engineering, Procurement and Construction reviews are conducted in Phase 4 to ensure that the project is on track to deliver a successful outcome. Items such as safety, quality, cost and schedule are reviewed at critical milestones on the project.
Post Project Assessment
This assessment, which is conducted at the end of Phase 4, compares end of project data to what was stated at FID on safety, cost and schedule. This information is then used to update the database, which in turn will help improve safety, cost estimates and schedules for future projects.
Business evaluation should be conducted 1 to 2 years after project completion to validate volumes, prices, margins, operating costs and economic indicators. The Project Sponsor should be held accountable for the business outcome.
Total Cost Management (TCM)
Figure 4 shows TCM tools to plan, schedule, estimate, monitor and report project progress.
TCM converts the optimized scope into cost and schedule. TCM not only helps us in planning, scheduling and estimating a well defined project before full funding, it also helps us monitor progress through the execution phase of the project.
Economic Analysis compares Net Present Value (NPV), Rate of Return (ROR) and Payout of projects and helps us determine the portfolio of projects that will maximize value for the corporation.
A cost estimate should reflect the best numbers based on the scope definition at any stage of project development. It should address the risks involved by clearly articulating the contingency and accuracy of the estimate. Estimates should be presented with the most likely number, the median (P50), the optimistic number (P10) and the pessimistic number (P90). These numbers capture 80% confidence interval for the estimate. The only time we will know the final exact number is at the end of the project.
Contingency by far is the most misunderstood term in the industry. Projects are funded at P50 level to maximize capital utilization for the corporation. Contingency or float is added to estimates to reduce the risk of cost overrun or schedule delay.
Planning / Scheduling
Planning defines all the project activities, links the activities into a network structure to show interdependencies and then assigns duration and resources to the activities. Scheduling takes the plan and assigns dates on which each activity will be performed. Critical Path Method (CPM) technique uses a network schedule to determine the activities that combine to make a “critical path” such that if one activity on the critical path slips, the project end date will slip. A resource loaded critical path schedule should be developed prior to full funding of a project. The actual schedule during the execution phase of the project should be compared to the target schedule and corrective actions should be taken on an ongoing basis. The required corrective actions may include changing resources or logic between the activities.
Benchmarking is a forward-looking quantitative approach based on the experience of past projects in the industry. This information should help in determining what the competition would spend on a similar project and how long they would take to execute. It also should assist the project team in setting challenging pacesetter project performance targets.
Contracting / Procurement
Contracting and procurement comprise a significant portion of many projects. Contracting and procurement plans include process required to acquire goods and services from outside the performing organization.
Typical steps in the Contracting / Procurement Process are Prequalification, Bidding/Negotiating, Evaluation & Agreement, Execution and Administration. The contracting strategy for Lump Sum, Reimbursable, Unit Price or Incentive Contracts depends on several factors such as scope definition, market conditions and risk tolerance.
Performance measurement uses the earned-value concept to track physical progress based on pre-determined milestones. A plot of budget, earned and actual cost is used to measure performance versus the plan for each discipline during the Engineering phase and for each craft during the Construction phase. This information is proactively used to take corrective action on cost and schedule.
Cost Control / Forecasting
Cost control and forecasting uses tools and procedures to track budgets and report expenditures and commitments against a Work Breakdown Structure (WBS). It uses a trending process to forecast final project cost.
A good progress report should include current and accurate information on the status of the project: plan versus actual data on safety, cost and schedule. It should also identify any problem areas and proposed corrective action.
Finance / Audit
All of the project cost data has ultimately got to be converted into asset accounting. Project costs are typically divided into two categories, namely Capital and Expense. Capital money has to be amortized over the life of the asset whereas Expense money can be written off in the year it is spent. The project team has to keep accurate cost data in order to support Finance/Audit.
With the implementation of a structured Project Development & Execution Process, application of Project Management Best Practices and Total Cost Management, a company can achieve world-class performance: safer, better, faster and cost efficient projects.
(1) Construction Industry Institute (CII), Austin, Texas
(2) Westney, Richard E., 2000, The Strategic Project Planner, Marcel Dekker, Inc.
Nick Lavingia will be presenting a live webinar with ITMPI on June 21! Sign up here: Excellence in Project Management for the Energy Industry (Safe, Better, Cost Efficient and Faster Projects)