Academic Analysis of Cost Overruns on Mega Projects

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Academic Analysis of Cost Overruns on Mega
Projects

• George F. Jergeas P.Eng., PhD
• Project Management Program
• University of Calgary

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Defining Mega Projects

• Cost gt 1 billion plus
• Significant interfaces
• Many players with different interests
• Issues risks must be managed at a level above
  the project team
• Fast tracked

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The Big Picture
AFE
1
2
3
4
5
PHASE 2 SELECT from Alternatives
PHASE 3 DEVELOP Preferred Alternative
PHASE 4 EXECUTE (Detail EPC)
PHASE 1 IDENTIFY Assess Opportunities
PHASE 5 OPERATE Evaluate
Operate Asset Monitor Evaluate
Performance Identify New Opportunities
Clearly Frame Goal Test for Strategic
Fit Preliminary Overall Plan Preliminary
Assessment 1 Engng. Phase 1 Estimate
Fully Define Scope Develop Detailed Execution
Plans Refine Estimate Submit Funding for
Approval 25 Engng. Phase 3 Est. (/- 10
Accuracy)
Generate Alternatives Preliminary Development of
Alternatives Develop Expected Value Identify
Preferred Alternative Phase 2 Est.
Implement Execution Plan Min. Changes Finalize
Operating Plan Business Plan for Phase
5 Project Review
AFE Appropriation For Expenditure
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Why Do Mega Projects Fail?

• Unrealistic estimates?
• Lack of governance accountability?
• Appraisal optimism?
• Is delusion necessary for projects to proceed?
  (re. Flybjerg Mega Projects Risk)
• Flawed execution plan?
• Owner role not performed effectively?
• Poor contractor performance?
• Doing what weve always done (and expecting
  better results)?

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Estimating Costs Risks
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Reasons

• Size of the project
• Many resources required
• Complexity of projects
• Technological complexity
• Executed by virtual teams
• Project organization structure
• Multiple owners that do not share same culture

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Reasons

• JV of Project contractors and engineering firms
  are not aligned
• Different cultures
• Need to ensure that their own responsibilities
  are executed as well as possible
• May be at the expense of the overall project

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Reasons

• Unrealistic Expectations
• The original cost estimate and schedules are for
  project sanctioning, not to provide a realistic
  goal for the project teams
• Poor/incomplete scope definition i.e. inadequate
  front end loading
• Poor quality/overly optimistic cost estimates

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Reasons

• Contracting strategies
• Not appropriate for the situation
• Project control
• Nobody has single point responsibility except the
  client who does not control much of the work
• Underestimation/under appreciation of project
  complexity
• Inadequate plan of execution

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Reasons

• Unrealistic schedule
• Poor project controls
• Poorly defined tasks and division of
  responsibility
• Lack of knowledgeable leadership in E, P, C,
  Start-up of major facilities
• Inexperienced/poorly equipped project management
  personnel and supervisors

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Reasons

• Shortage of skilled labour and lower than
  anticipated labour productivity
• High labour turnover
• Changing customer requirements
• Lack of understanding the costs of changes

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Reasons

• Poor communication and follow-up
• Poor site organization leading to excessive time
  wastage
• Inability to understand, plan, adapt, implement
  procedures or systems

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The Feasibility Study

• A very comprehensive document
• Considerable amount of work to scope the project,
  select the technologies to be used and present a
  business case
• Lots of time and effort
• What Owner wanted to do
• How much it would cost
• What the economics of the investment would be and
  
• What the risks might be

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The Feasibility Study

• No sufficient level of detailed work done to
  achieve the level of accuracy and confidence that
  the owners decision makers place in it when a
  project is approved
• To achieve a level of accuracy of the estimate of
  10-15, we need a 30 engineering completion
• The right 30 - not just any 30
• in particular considerable technical information/
  engineering is required from equipment vendors

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The Feasibility Study

• Limited input from Operations
• May be unknown at this time
• Operations input is invaluable when considering
• Plant and equipment layout
• Equipment selection
• Determining the ongoing operations costs and
  staffing needs
• Laying out the pre-commissioning and
  commissioning requirements and costs, start-up
  and early production projections.

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The Feasibility Study

• Downplays or overlooks Organizational Performance
  - both at the Joint Venture level and at the
  Project level
• New companies with new and unproven technology in
  industry new to partners
• Complexity on complexity
• Benchmarking and Risk Analysis services
• External reviews
• Several concerns are usually raised
• Cost and schedule projections are not
  aggressively challenged

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The Feasibility Study

• Not challenged aggressiveness of start-up and the
  production ramp up curves
• Optimism and a lack of meaningful operations
  input contributes to false hopes on the part of
  the owners
• Overlooking potential impact of new technology
  and the inefficiencies and problems that could
  result from a new joint venture and sometimes new
  players

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The Feasibility Study

• How seriously the project team takes the concerns
  that are raised in the external reviews and
  respond to them?
• Not referred to at all
• Acknowledgement of the concerns and with a
  comment that they are being addressed and that
  mitigating actions will be taken.

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Delays in Engineering

• Early delays in achieving key milestones such as
• Substantial Completion of Engineering
• Freezing Process Flow Diagrams (PFDs)
• PID issued for design
• Delays do not seem to be reflected on final
  project completion date
• Fast-tracking the fast-track!

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Delays in Engineering

• A number of development steps
• Production of PFDs - show the logic of the
  various chemical steps that will be used in the
  new facility.
• The quantities of each of the process streams
  will be shown
• Review and approval of owner before the next
  development step is released

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Delays in Engineering

• Develop the Process and Instrument Diagrams
  (PIDs)
• Identify all the pieces of equipment required for
  the process to work
• Identify all piping required together with
  identification number, size, wall thickness and
  metallurgy, valve locations and type as well as
  control logic and hook-up
• PIDs contain critical engineering detail that
  must be agreed upon before the construction
  drawings can be started

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Delays in Engineering

• Series of extensive reviews before PIDs are
  approved and the detailed discipline engineering
  can begin.
• PFDs and PIDs Milestones are some of the first
  Milestones and it is only once they have been
  reached that succeeding activities can be
  started.
• In fact the Engineering build up can only take
  place once these early Milestones have been
  achieved - hence their importance.

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Delays in Engineering

• This would put pressure on the completion of the
  succeeding activities.
• The delay in Engineering can also be caused by
• Additional work by the steady stream of trends
• Either adding to original scope or requiring work
  already completed to be re-done
• Slower build-up of the engineering workforce than
  planned
• Lower engineering productivity than expected
• Whatever the reason(s), how do Project Managers
  react?

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Trend System

• Changes to the base (AFE) are documented so that
  the potential cost and schedule impact can be
  flagged and estimated.

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Trend System (cont.)

• When a trend is raised, the originator has to
  indicate not only the estimated cost but the
  schedule impact of the trend.
• Early trends would not change the Mechanical
  Completion date
• PM can mitigate the delays, by adding people ...

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Trend System (cont.)

• PM should regularly be assessing the cumulative
  effects on the overall schedule.
• As the number of trends climbs, one thing is
  certain - more work and more costs are being
  added to the project, and more hours must be
  spent before the project is completed.
• This means that either the end dates slip or the
  additional work identified will take away from
  the flexibility that was originally in the
  schedule (if any) thus making the probability of
  achieving the schedule less likely

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Cost Allowances and Contingencies.

• To cover for design changes, material quantity
  increases
• Historical and risk based
• The PM should be running down the allowances
  and contingencies according to some agreed upon
  plan
• The huge number of trends raised at the early
  stage of a project can provide Warning signal to
  the PM that events are not evolving as expected

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GOLDEN RULES FOR AN UNSUCCESSFUL PROJECTS
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• NEVER prepare a realistic cost and schedule
  estimate

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Project Estimate

• NEVER provide a good quality cost estimate
• Underestimate/under appreciate project complexity
• Make sure the final completion date is cast in
  stone
• Be optimistic and any delay during front end or
  engineering will be absorbed by construction!

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• NEVER conduct a sufficient Front End Planning

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Front-end Planning

• NEVER define the scope of work properly
• Highly schedule driven
• Push everything to construction
• NEVER develop alternatives and then select the
  best alternative
• NEVER make clear what is in scope and what is out
  of scope
• NEVER consider a proper risk analysis and
  management with contingencies for both Tactical
  and Strategic risks

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Strategic Risks

• Global Risk Examples
• Broad political uncertainty such as country and
  regional instability or changes of government
• Product Market issues that affect the spread
  between production costs and product price
• Project Market issues that affect product and
  service availability or pricing for project
• Public opposition
• Global and regional economic trends

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Strategic Risks

• Enterprise Risk Examples
• Quality of Project Delivery System- (Governance,
  People and Systems)
• General business provisions that limit choice or
  action
• Partners and issues above the project
• Issues with the local government
• Organizational alignment on project goals
• Scope - (Does the project as represented to the
  project team identify every element that will
  eventually be required?)

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Tactical Project Risks

• Definition (Degree of scope definition in
  relation to stage of project)
• Contracting strategy effectiveness
• Front End Loading effectiveness
• Issues with compliance with local government laws
  / requirements
• Effectiveness of Management of Change
• Materials identification and management
• Logistics risks
• Procurement (pricing) risks
• Engineering Productivity and schedule adherence
• Construction Productivity and schedule adherence
• Site related risks

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Categorize Project Risks to Better Understand Them
Authority / Accountability
Management

• e.g.
• Management intervention in PMT tactics leads to
  internally driven risks

• e.g.
• Political
• Global economic trends
• Partner / NOC issues
• Organizational alignment

• e.g.
• Project definition
• Contractor performance
• Pricing
• Logistics

• e.g.
• Unmitigated strategic risks become tactical
  problems for PMT

PMT
Tactical Strategic
Risk
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• NEVER develop an appropriate contract strategy

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Contract Strategy

• NEVER break the Project to Manageable chunks
• NEVER select the right contractual arrangement
  and payment structure
• Always adopt fast-track strategy
• With Lump sum combination
• On Mega Oil Sands Projects adopt a cost plus
  approach
• ALWAYS ASSUME that
• Multiple owners share same culture
• JV of contractors and engineering firms are
  aligned and set up to work effectively

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• NEVER apply a proper project control system re
  schedule, cost, safety, quality

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Project Control

• NEVER make clear who has single point of
  responsibility
• NEVER freeze the design
• NEVER worry about early warning signs such as
  number of trends, changes, consumption of
  contingency and project float
• NEVER pay attention to interface management

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• NEVER pay attention to labour productivity

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Construction Productivity

• NEVER consider the following
• Labour relations and morale
• Communications
• Material
• Equipment
• Scaffolding
• Subcontractors
• Supervision and leadership
• Overtime and acceleration
• Workface planning

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• NEVER FAMILIARIZE YOURSELF WITH THE CONTRACT

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ALWAYS ASSUME

• CONTRACT JUST LIKE OTHERS
• MUST BE FAIR and reasonable

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No Damage for Delay

• The contractor shall not have any claim for
  compensation for damages against the owner for
  any stoppage or delay from any cause whatsoever.

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• NEVER IDENTIFY SCHEDULE EFFECT

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Never document delays and impacts Never request
appropriate extension of time Never make clear
who pays for additional costNever make clear
who pays for acceleration
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• NEVER QUALIFY YOUR CHANGE ORDER PRICE

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ALWAYS ALLOW OWNER TO ASSUME PRICE OF CHANGE
ORDER INCLUDES

• SCHEDULE EFFECT
• IMPACT ON CONTRACT WORK
• CUMULATIVE EFFECT
• PRODUCTIVITY IMPACT

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NEVER WAIT FOR WRITTEN AUTHORIZATION BEFORE
PROCEEDING WITH A CHANGE
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ALWAYS

• ASSUME People are fair and reasonable
• Time is of the essence
• Engineers and contractors focus on getting the
  work done!!

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• NEVER MAINTAIN PROPER JOB RECORDS

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PROPER RECORDSMIGHTALLOW YOU TO JUSTIFY
QUANTIFY THE REQUEST FOR ADDITIONAL
COMPENSATIONTHIS SHOULD BE AVOIDED!
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• NEVER READ AND IF NECESSARY OBJECT TO MINUTES OF
  MEETINGS

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Thats all and thank you