Capital projects across all industries have been executed under unusually high-risk conditions in the past 2 years. For this article, IPA has identified the top five risks for Europe chemicals projects most often flagged by teams during 29 recent project authorization reviews. On average, the estimated individual effect of these risks is about 2 months out of a total execution duration of 20 months (or 10 percent) and 5 to 10 percent of the total installed cost (TIC). This could mean the difference between success and failure for marginal projects or for projects that have most of these five risks at the same time. These risks and their potential causes and consequences act as a reminder of the major internal and external constraints that capital projects face in execution today.
1) COVID-19 and Productivity
Despite some signs of recovery, many recent projects still report the COVID-19 pandemic as their top risk:
- Many projects flagged availability of engineering resources as a risk. Indeed, COVID-19 has pushed owners to work from home and rely on videoconference meetings, contributing to a 5 percent decline in productivity, on top of degrading quality due to lack of in-person verification of contractor work (see IPA’s article, How the Capital Projects Industry Is Responding to COVID-19). Moreover, owners have experienced attrition of experienced staff and contractors reduced their headcount at the start of the pandemic to cut costs, which has further exposed projects to schedule and quality issues through lower project resource competency. However, COVID-19 risks reported within risk management plans all too often focus on the potential for delays in materials and resources (availability of site visits, late deliveries, economic stability of vendors/contractors, etc.), which, while important, do not acknowledge this engineering competency aspect.
- Others flagged issues with construction labor productivity. Even if industry has greatly improved since the start of COVID-19, most companies are still experiencing an 8 percent productivity decline compared to pre-COVID-19 conditions, with some saying that returning to pre-COVID-19 productivity is implausible given that additional safety measures implemented in the pandemic are unlikely to disappear in the future.
2) Supply Chain and Procurement
Project teams have rightly identified the vulnerability of the supply chain due to COVID-19 effects as a major risk, which continues to hold true across all industry sectors almost 2 years after the pandemic’s onset. Lack of personnel and lockdowns at ports, supplier bankruptcies, and raw materials bottlenecks are still causing disruptions despite a recent global reduction in cases. This is greatly hampering project procurement, affecting major equipment to the greatest extent, particularly equipment with long-lead times and unique fabrication requirements. Electrical and instrumentation (E&I) is close behind, with microchip vendor delays predominate among these.
Instead of doing a deep-dive analysis of the many layers of their supply chain, the mitigations of most companies have so far been too simplistic (ordering earlier or planning for a sunk fund to cover potential overtime to mitigate any delay).
While inflation has already harmed the profitability of some business cases due to higher feedstock cost, in Europe this escalation has already put a strain on capital cost, with inflation indices at almost 7 percent year on year—double the escalation rates of the past 10 years. While the risk is commonly identified, companies unfortunately do not have sufficient intelligence on this topic and estimating databases are often outdated, leading to huge growth in bulk materials and equipment costs. In this economical context, project teams need to ensure that estimating information is current—not the easiest task in today’s context given that some vendors only offer quotes that are valid for a few hours.
4) Complex Technical Scope
Europe chemicals projects with complex technical requirements are inherently high risk and are often executed within space-restricted brownfield facilities, within turnarounds, and/or with geotechnical risks. For these projects, the risks often materialize with quality issues in engineering and later-on clashes during construction, delaying projects and increasing costs. Most companies that have articulated a clear mitigation strategy plan to avoid these risks with alignment early in the project timeline between the project team and other stakeholders (business, site leadership, turnaround representatives, operations, and maintenance).
5) Interfacing Requirements
In contrast to technical risks, which are inherent, are interfacing requirements, which manifest from the project environment, and are most commonly reported to arise from multiple projects being executed in parallel, ongoing operations and maintenance duties, or turnaround requirements. When interfacing requirements are complex, the most sophisticated mitigations reported involve integrating project execution plans and schedules with interfacing groups. Without such mitigations, design changes (e.g., due to clashes) are common and there is increased risk of slip during turnarounds, which owners need to avoid given the disproportionate costs associated with potential loss of production.
The top risks identified for recent Europe chemicals projects have the potential to cause projects to overrun their cost (driven by escalation and/or technical risks) or slip their schedules (due to procurement, interface issues, resource availability, and COVID-19-associated productivity reductions)—or both. Note that projects completed in Europe in 2021 ended up needing twice the contingency amount that was set at authorization due to realization of similar risks. So it is important for projects currently in development to quantitatively adjust for these risks during the cost and schedule risk analysis process.
The current economic and geopolitical environment has increased the likelihood that these risks will occur; while we still do not know the true impact of the Russia/Ukraine conflict on the EPC market, initial observations indicate exacerbation of the top risks identified in this study. Therefore, comprehensive risk management with articulated and actionable mitigation strategies that offers execution alternatives needs to be considered: for some, it might mean to lower engineering specs to purchase off-the-shelf instead of custom-built equipment; for others, it might be to reduce the supply chain complexity by finding synergies at sub-nodes.
Contact IPA to discuss risk mitigation strategies for your chemicals projects.