Global productivity losses and declining engineering quality are among the reasons owner companies are not delivering more effective capital projects, according to Independent Project Analysis (IPA) Inc., research presented to the Industry Benchmarking Consortium (IBC).
The IBC, a cooperative effort facilitated by IPA to improve capital effectiveness among its industry members, meets every year to review project development and execution issues and find out how the individual member company’s project performance ranks against industry competitors. The IBC met for the 25th time March 23-26, 2015, at the Lansdowne Resort near Leesburg, Virginia.
Recent IPA research indicates that the cost performance of large capital projects remains worse than what owner companies were able to deliver prior to the global financial crisis in 2008. Due to lower work productivity and poor project definition, or Front-End Loading (FEL), project schedule slip is worsening and project teams are setting soft cost targets to avoid overruns. Research suggests that the global shortage of quality engineering talent is driving degraded capital performance across Industry.
In his keynote address at the IBC 2015 conference, IPA President and CEO Edward Merrow remarked on key areas of concern for Industry. Most notably, there has been a worrisome increase in the frequency of “de facto” authorizations for cost-driven projects, when a company authorizes sufficient funds for project execution to begin before the project completes definition.
Interestingly, the data show that the rise in this phenomenon has not been accompanied by an increase in the frequency of schedule-driven projects in Industry. As such, these projects appear to be rushing for reasons that are not logical in light of long-term capital effectiveness. Merrow said he suspects the commercial organization’s “dash for cash” mentality is to blame for de facto authorizations, despite IPA research showing that the strategy undermines capital effectiveness.
IBC Consecutive Attendance Recognition
The following long-standing IBC companies were recognized at IBC 2015 for their demonstrated commitment to continuing improvement in capital effectiveness and consecutive attendance at IBC conferences:
- All 25 IBCs – Eastman, Chevron
- 21 IBCs (from 1995 to 2015) – BP
- 20 IBCs (from 1996 to 2015) – Dow
As usual, IPA presented several new research studies at the consortium meeting, leveraging a rich database of more than 17,000 capital projects.
Contracting for Engineering and Construction
Merrow, who led the contracting study, discovered that since the early 2000s, use of engineering, procurement, and construction (EPC) lump-sum contracts has all but disappeared in many global regions, including Southeast Asia.
In its place, the EPCm contract form has become the dominant global contracting approach, although the data show that this strategy is almost universally correlated with poor cost performance. (IPA analysts Chris Valleau and Neal Banks helped prepare the study.)
Understanding FEL Durations
This study revealed that widespread focus on FEL speed is misplaced. More than 70 percent of recent large projects missed their planned end of FEL date. It is more important to set a predictable FEL end date and give project teams sufficient time to achieve Best Practical definition. The study also used historical data from refining and chemicals projects to identify key factors that add or subtract time from a given project’s FEL duration. (IPA analysts Chris Mullaly and Dhiraj Pant prepared the study.)
Engineering Value Centers (EVCs)
Use of EVCs has been increasing for the past decade, but the percent of engineering executed in EVCs remains around 30 percent of all engineering. Project engineering slip occurs much less when EVCs are used, and the use of EVCs makes a project more cost effective. The research shows that projects using EVCs generally have better drivers and therefore perform better than those that don’t, which suggests that when project teams have more cause to be wary, their due diligence improves. (IPA Subscriptions Director Dean Findley and analyst Kate Rohrbaugh prepared the study.)
IPA introduced a new methodology called Site Dynamics, which measures a site-based project organization’s perception of their working environment. The tool can be used to tailor improvement plans and better understand the capital performance of site-based systems. (IPA analysts Karine Cung and Chris Lampris prepared the study.)
Industry representatives also delivered presentations at this year’s consortium meeting, and for the first time at an IBC gathering, contractor firm representatives were invited to attend select sessions and participate in a panel discussion. Several breakout meetings focusing on topics such as project assurance, team organization, megaprojects, and cost controls were also held.
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