Are Site-Based Projects in Latin America More Difficult Than in Other Regions? – An Analysis
Managers of site and sustaining capital (SSC) projects in Latin America contend with a variety of perceived region-specific obstacles to delivering capital effective site-based projects. Logistics and supply chain challenges, infrastructure inefficiencies, limited project team resources, poor labor quality, and taxes—and more taxes—are a few oft-cited reasons for disappointing SSC project outcomes throughout the region. Is it really more difficult to deliver cost and schedule competitive SSC projects in Latin America? Independent Project Analysis (IPA) recently looked at regional SSC project data and practices followed by site-based owner teams to find out.
Over the past five years alone, IPA has assessed more than 150 sustaining capital projects at 18 Latin American manufacturing sites. The projects represent a diverse cross-section of industries—refining; chemicals; mining, minerals, and metals; pipelines; and distribution. Located predominantly in Brazil, Chile, and Argentina, the project costs range from $0.3 million to $26 million.
IPA found that, on average, site-based project performance across Latin America lags the industry average of SSC projects in other global regions. To better understand the findings, let’s take a closer look at IPA’s recent examination of SSC projects in the region over the last five years.
Cost Predictability: We looked at how often actual costs deviate from their full-funds authorization estimate. The results are bi-modal: projects presented either small deviations or large ones—up to a 30 percent deviation in absolute numbers. Systems with large underruns seem to be using cost reduction exercises, cutting scope, or even changing strategies after authorization—or simply padding cost estimates. On the other hand, systems with large overruns did not account for the uncertainties resulting from their failure to adequately define the projects. Almost inevitably, late changes were necessary and there was not enough contingency to absorb them all. Although companies may prefer underruns to overruns, large deviations—positive or negative—are detrimental to system performance.
Cost Competitiveness: Projects in Latin America are indeed less competitive than worldwide projects. In the last 5 years, no site in Latin America had projects that were more cost-effective than the global average, according to IPA data. Some sites in Latin America even spent an average of 50 percent than is typically required for the same scope. In a yearly portfolio of $30 million, this means that these companies could be wasting $15 million per year.
Schedule Predictability: When we look at execution schedule predictability, only one site completed projects slightly faster than planned. All the other sites slipped their project execution schedules. On average, project execution slip was 22 percent, but some sites slip by 70 percent! However, here comes the surprise: on average, projects in Latin America are as unpredictable as global industry projects as the typical industry slip for site projects is 20 percent.
Schedule Competitiveness: It turns out that these unpredictable projects are also less competitive. On average, execution schedule outcomes were 35 percent slower when compared to similar projects.
Are Latin America’s Projects Set Up for Success?
When evaluating site performance, one critical area of focus is project definition. During an IPA site-based (or any other) capital project evaluation, we assess the creation of project development work process deliverables. For example, IPA looks at whether a project team’s cost engineers included sufficient detail in their cost estimate and schedule planning. We assess whether the project team collected sufficient information in the Front-End Loading (FEL) phase to reduce project execution risk. IPA’s evaluations give project teams independently produced insights into whether their project is set up for success before business authorizes funding for construction. A non-existent or inadequate project work process, fragile gatekeeping, and thinly stretched project teams are often causes of poor definition. In Latin America, 64 percent of sustaining capital projects, on average, had Poor or worse project definition at authorization. The global industry average SSC project receives a Fair definition rating from IPA, but still well short of the desired Best Practical rating. Therefore, it can be said that projects in Latin America fail to define their projects as well as other global projects, thus driving the unpredictable outcomes.
Attention to Teams: Another critical area assessed by IPA in our evaluations of site projects is the project team itself. IPA’s Team Development Index (TDI) measures the project team factors that drive project performance, taking into consideration the team’s functional composition and clarity of roles and responsibilities. Across Industry, global site-based projects routinely fall in the Fair range, but projects located in Latin America are in the Poor range. Though some sites succeed in reaching strong team development, IPA finds that others struggle to define clear objectives. In addition, not all functions satisfactorily participate in the definition work process—operations, maintenance, and construction management input is often missing.
Weak Project Controls: Although Latin American project teams and definition trail the rest of Industry, our analysis of another key area, project controls, provides a pleasant surprise. Globally, site-based projects have struggled to implement strong project controls, but the Latin America sample had stronger control practices in place than worldwide industry projects. The industry average for IPA’s Project Control Index (PCI) falls in the Poor range, but 64 percent of the Latin America sample fell in the Fair or Good ranges. The driver of these better results is more frequent and detailed reporting during execution. Indeed, sites in Latin America adhere more to execution discipline.
Does a Commitment to Improvement Pay Off?
The first site had substantial improvement in both practices and performance—some projects demonstrated the site’s capability to use good practices and deliver cost and schedule excellence. Through these improvements, this site, which has an average annual capital portfolio of $50 million, saved $6.5 million per year. The second site enhanced all project drivers, which allowed substantial improvement in the site’s cost and schedule performance. These results allowed the site, which has an average annual portfolio of $75 million, to save close to $10 million per year.
Of course, there are some other important drivers of capital project outcomes that site project teams plan for but do not control directly.
Supply Chain Challenges: Emerging growth economies pose unique challenges for all supply chains, and Latin America is no exception—market and financial volatility, supply chain disruptions, security issues, infrastructural challenges, and lack of transparency are some of them. The effects of the COVID-19 pandemic on global and regional supply chains only complicates matters. Supply chain challenges are very common in Latin America and get even harder for projects developed in remote locations.
Infrastructure Inefficiencies: Local projects are greatly affected by the lack of high-quality services and assets, such as roads, rails, ports, airports, energy supply, and transmission lines, among others. Poor infrastructure services are among the main challenges Latin America countries currently face.
Although the SSC project managers perceive region-specific obstacles to delivering capital effective site-based projects, we can see that it is possible to extract value from smaller projects. Once the team is committed to embracing improvements in fundamental drivers—strong project definition and project teams in particular—better outcomes are achievable. It may be harder in Latin America than in other regions, but it is not impossible.