A flood of capital spending in the United States is threatening to once again strain project supply chains, forcing companies to find and procure engineering services, materials, and equipment for their large projects earlier.
A recently completed multi-client research study by Independent Project Analysis (IPA) explored the consequences of the stretched supply chains on projects in the United States. Conducted in two phases, Phase I examined project outcomes and supply chain trends during the last U.S. “hot market” for capital spending from 2004 to 2007. Phase II focused on strategies companies can use to mitigate risks in project construction as the market begins to heat up yet again. Kristin Lewis, IPA Associate Analyst and the principle investigator for the study, said the coming increase in capital spending will outpace the previous U.S. hot market. “The question is whether more projects will experience failure and how engineering services and the rest of the supply chain will hold up,” said Lewis.
Capital Project Failure Modes Identified
Phase I of the study wrapped up in fall 2013 and found that the failure rate for capital projects—projects that experienced more than 25 percent real cost growth or execution schedule slip or incurred a fatality—doubled during the last heated market. The study identified several failure modes that contributed to poor project outcomes. Some failure modes, such as open scope at Front-End Loading (FEL) 2 and reliance on weak owner engineering, are common during regular markets, but many other failure modes were directly related to project supply chain issues. In particular, stretched supply chains forced companies to compete for limited engineering contractor resources. The number of changes in engineering increased and engineering quality declined. In addition, projects that maintained the planned start date of construction after engineering slipped had poor field productivity. These factors contributed to the 60 percent failure rate of large projects between 2004 and 2007 compared with the pre-hot market failure rate of approximately 30 percent.
Engineering Value Centers & Modular Construction
Phase II of the study, completed in spring 2014, examined major announced capital projects to create U.S. capital spending scenarios based on historical project performance seen in Phase I. For example, the study factored in project kill ratios based on the Phase I findings. Phase II of the study further offers strategies project teams may consider to mitigate project risks in the coming hot market. For instance, the study takes an in-depth look at the perceived benefits of using offshore engineering value centers (EVCs). Although valued for their “guaranteed” labor, EVCs pose additional challenges to contractors and owners alike, particularly around communication and quality management. These challenges require additional owner resources, which can be difficult to secure in a resource-short environment. The study also examined the pros and cons of selecting modular construction strategies. Companies must agree to pursue a modularization strategy early on and project teams should have a firm understanding of why they believe modular construction is appropriate for their project. The team should also recognize the logistical challenges that are involved with modular construction, Lewis said of the study.
The entire study relied on IPA’s extensive project database and two-and-a-half decades of experience evaluating thousands of projects in the United States and abroad. Phase II also involved interviews and surveys of industry experts and information collected from other outside sources, including trade journals and statistical data from federal and state agencies.
The study, Supply Chain Risks to Large Projects in the United States, is complete and open to new participants. Participants will receive full access to the study results, which include two 3-hour presentations by Kristin Lewis.