2. ed merrow presentation

1ECIs 23rd Annual Conference 2012

The European Construction Industry Facing the Global Challenges

26 & 27 April 2012Hilton Hotel, Dusseldorf

2Industrial Megaprojects Concepts, Strategies and

Practices for Success

Ed MerrowPresident & CEO

Independent Project Analysis, Inc. (IPA)

3Our Vantage Point on the Industry

Independent Project Analysis evaluates industrial projects, large and small, around the world Are the projects ready to proceed to the next

phase?

Are the projects set up to succeed (or fail)

At the end, did the projects accomplish their goals?

In a typical year, 700-800 new projects are added to our databases

4Our Vantage Point on the Industry

About 10 percent of these projects fall into the very large categorywell over $1 billion in capital

The number of these very large projects has increased dramatically over the last decade, controlling for escalation

We are deeply concerned about their results

5Some Key Questions

Projects are getting larger and more complex everywhere in the world

As we will see, large projects fail much more often than their smaller counterparts

Do large projects fail more often simply because they are more difficultordo we alter our practices?

As project leaders and professionals, what do we need to do differently?

6Outline

The Data

The results of large industrial projects

The proximate and root causes of failures

Implications for project management

7$3,250Project Cost (in millions 2011 US$)

Megaprojects Database

Number of Owners Represented

Percent of Projects with Any New Technology

Average Execution Duration (months)

Average Authorization Year

Number of Projects

77

36%

43

2005

318

Research Database Description

Characteristics

8Industries Represented

Petroleum Processing Petroleum Processing 21%21%Chemicals Chemicals

10%10%

Mining, Mining, Minerals & Minerals &

Metals Metals 15%15%

LNG LNG 8%8%

Power Power Generation Generation

3%3%

Distribution Distribution 2%2%

Other Other 2%2%

Oil & Gas Production Oil & Gas Production 41%41%

CONFIDENTIAL INDEPENDENT PROJECT ANALYSIS9

United States 13%

Europe15%

Asia9%

Australia9%

Africa9%

South America19%

Geographical Distribution of Megaprojects

Canada7%

Central Asia 4%

Middle East15%

10

Outline

The Data

The results of large industrial projectsThe results of large industrial projects The proximate and root causes of failures

Implications for project management

11

Costs grew (real)

Schedule Slipped

Execution time (Absolute Measure)

Severe and Continuing Operational Problems into Year 2 after startup

Defining Success and Failure

About two-thirds of large projects failed by these criteriatwice the rate of small projects

Overspent (Absolute Measure)

25% +

25% +

50% +

Yes

25% +

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Megaprojects

Failure Rate

Projects


80%

COST INDEX

PRODUCTION

EXECUTION SCHEDULE INDEX

EXECUTIONSCHEDULE SLIP

COST GROWTH

1.3

1.0

1.2

1.0

1.3

1.2

1.1

0%10%

30%

20%

0%

Failed Projects (65 percent)

Successful Projects (35 percent)

40%

100%

60%

1.1

10%

20%30%

Megaprojects Split Into Radically Different Groups

13

Is Failure Driven by Geography?

The OECD countries success rate is indistinguishable from the overall average

Europe is no better than average

The Middle East fares a little better

Australia and Central Asia have a lower than average success rate

14

Is Failure Driven by Industrial Sector?

Petroleum development and minerals megaprojects fare worse than industry average

Chemical industry does a little better

However, these results are driven by differences in practices, not sector

15

Outline

The Data


The proximate and root causes of failuresThe proximate and root causes of failures Implications for project management

16

The Proximate Causes: Weak Practices

The effects of poor practices are much more devastating for large and very large projects because larger and more complex projects are inherently fragile

Four critical practices set megaprojects up to succeed or fail: Clear objectives for the team

All key owner functions involved in development

Stability in project leadership

Complete front-end loading (FEL) prior to sanction

17

The Project Objectives Problem

Coherent project objectives are the foundation on which a strongproject team is built

This requires that all of the objectives being articulated in a meaningful waynot just some empty nostrum such as make a lot of money

It requires that the trade-offs amongst objectives are understood and that clear priorities are established

So, how are we doing?

Clear ObjectivesClear Objectives


0

10

20

30

40

50

60

70

Very Fairly Somewhat Unclear

Under $500MM Megaprojects

P

e

r

c

e

n

t

o

f

P

r

o

j

e

c

t

s

Only a Slight Difference in Clarity of Business Objectives Between Megas and Non-Megas

Team Understanding of Project Business Objectives at Sanction


0

10

20

30

40

50

60

70

80

Very Fairly Somewhat Unclear

Under $500MM Megaprojects

P

e

r

c

e

n

t

o

f

S

u

c

c

e

s

s

f

u

l

P

r

o

j

e

c

t

s

But Differences in Effects Are Huge

Team Understanding of Project Business Objectives at Sanction


Trade-offs Are Less Clear for Megas

0

5

10

15

20

25

30

35

40

45

Very Clear Fairly Somewhat Unclear


Team Integration Is a Necessary Condition for Effective FEL

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%Projects Without Integrated TeamsProjects With Integrated Teams

P

e

r

c

e

n

t

o

f

P

r

o

j

e

c

t

s

MiserablePoorFairGoodBest

FEL Index

Missing critical functions during FEL damages quality and Missing critical functions during FEL damages quality and completeness of the frontcompleteness of the front--end workend work


Turnover of the Project Leader HurtsBut It Destroys MegaprojectsBut It Destroys Megaprojects

0%

5%

10%

15%

20%

25%

30%

35%

40%

$10MM -$25MM

$25MM -$100MM

$100MM -$250MM

$250MM -$500MM

Megaprojects

E

f

f

e

c

t

o

f

P

M

T

u

r

n

o

v

e

r

o

n

P

r

o

j

e

c

t

F

a

i

l

u

r

e

R

a

t

e

Project Size

Leadership TurnoverLeadership Turnover


25%

30%

35%

40%

45%

50%

10 50 100 150 200 250 300 350 400 450 500

Cost 2011$ (million)

P

e

r

c

e

n

t

o

f

P

r

o

j

e

c

t

s

t

h

a

t

E

x

p

e

r

i

e

n

c

e

P

r

o

j

e

c

t

M

a

n

a

g

e

r

T

u

r

n

o

v

e

r

Larger Projects Experience More Frequent Project Manager Turnovers Even After

Controlling for Schedule

Turnover rate in Megaprojects


0%

1.00

10%

COST INDEX

PRODUCTION FAILURES

SCHEDULE INDEX SCHEDULE SLIP

No TurnoverTurnover

COST GROWTH

1.40

0.90

1.20

1.00

10%

40%

20%30%

1.10

40%30%

20%

60%

30%

20%

10%

0%

40%

1.20

1.10

0.90

1.40

Project Director Turnover Relates to All Outcome Metrics

1.30

1.30

50%

25

Why is Turnover So High?

Some suspect the turnover is high because owners are replacing failing project managers

In fact, that is rarely the case; contractor PMs are the usual designated scapegoats

Some turnovers are caused by irrational staffing and the shortage of project personnel

But the principal cause of megaproject turnover appears to be simple burnoutsimple burnout

Project director turnover is strongly related to the business sponsors setting highly aggressive schedules

26

Why Is Turnover So Damaging? Complex projects need to integrate a large number of

owner functions into a coherent whole

The project director and immediate reports form the glue that binds the project together

When the project director leaves for whatever reason a significant unraveling of the project occurs All informal agreements disappear

There is a period of indecision while learning occurs

The turnovers provide an avenue for opportunistic behavior, especially with regard to changes

27

Front-End Loading is the Key Practice

IPA measures the quality of pre-sanction work with an index that has been developed and improved over the past 35 years

The FEL index is the single most reliable predictor of how any project will turn out

The index measures the definition of the project in its context, the completeness of basic engineering, and the quality of the execution planning

We convert intervals on the numerical index to descriptive words in presentation

FrontFront--End LoadingEnd Loading


0%

10%

20%

30%

40%

Best Practical Good Fair Poor Screening

FEL is Most Important for Megaprojects

E

f

f

e

c

t

o

f

F

E

L

o

n

t

h

e

C

o

s

t

I

n

d

e

x

FEL Index

Megaprojects

MISERABLEPOORFAIRGOODBEST

250 - 500

100 - 250


0%

10%

20%

30%

40%

50%

60%

70%

P

e

r

c

e

n

t

a

g

e

o

f

P

r

o

j

e

c

t

s

FEL Index


How Well Are Megaprojects Defined at Authorization?


0%

10%

20%

30%

40%

50%

60%

70%

Percent in Group Percent Successful in Group

What Difference Does it Make?P

e

r

c

e

n

t

a

g

e

o

f

P

r

o

j

e

c

t

s

FEL Index



Objectives, Team Integration, and FEL

Very Clear Fairly Clear SomewhatClear

Not Very Clear Not Clear At All

F

E

L

I

n

d

e

x

Clarity of the Objectives

F

a

i

r

B

e

s

t

M

i

s

e

r

a

b

l

e

G

o

o

d

P

o

o

r

Pr < 0.0001

Pr < 0.91

Source: Industrial Megaprojects

Team Is Not IntegratedTeam Is Integrated

32

Practices that Drive Megaprojects Results

1. Clear and fully articulated business objectives

2. Full functional integration of the teams

3. Continuity of team leadership

4. Excellence in front-end definition and planning

33

Practices are more important for large projects

The effects of poor practices are far more destructive for larger projects

The fact that the practices we follow for large projects are not as good as those for smaller projects is the proximate cause of the high rate of failure

But it merely raises a deeper question: why would we systematically follow poorer practices on our most important projects?

Practices Drive But Do Not Really Explain

Root CausesRoot Causes

34

A simple reason is that practices are more difficult and resource-consuming on larger projects Front-end loading costs will be in the many millions of dollars

for megaprojects

The sheer numbers of people required to properly staff teams are larger and often exhaust available resources

It is difficult to recruit team members when remote sites are involved

Difficulty contributes to poor practices, but is a secondary cause

The primary cause is the drive for unachievable speed

Why Do Practices Degrade on Large Projects?

35

In Megaprojects, Speed Kills!

The drive for speed results in the projects outrunning: Basic (Technical) Data development

Stakeholder alignment

Permitting requirements

Front-end loading development

Even the business deal may be incomplete

Large projects cannot recover from cut-corners

There are too many business cowboys with weak accountability for results driving the projects too fast

36

Mamas, dont let your babiesgrow up to be cowboys!

Willie Nelson

37

Outline

The Data


The proximate and root causes of failures

Implications for project managementImplications for project management

38

The Need for Change is Clear

As a profession, our track record of failure on major industrial projects is not acceptable

This is true even though project management professionals are rarely the actual source of the failures

Most of the failures are caused by owner business professionals who too often do not understand the basics of the projects they put off the rails

Just as every contractor knows that managing the client is essential, owner project professionals must learn to manage their business clientele

39

Redress and Rebalance

Most of the teams on the failed megaprojects knew the projects were headed for disaster well sanction

They also felt there was nothing they could do about it

During the 1990s, project management was relegated to the backseat in many industrial companies

We became progressively passive in the face of the new business model with its focus on immediate gain

Although the market situation changed in 2004, we did not redress the imbalance that had emerged between the technical functions and the businesses

40

Redefining Project Management for Large Projects

An essential project management skill is the ability to speak truth to power effectively

We must see ourselves and then be seen as equal partners with the businesses in creating successful capital assets

We need business education for project professionals

We need capability to speak effectively to those who do not understand the havoc they are creating

Unless we change, we must look forward to another decade of large project disasters

41

Thank you for Thank you for your Attention!your Attention!

42

European Construction Institute

www.europeanconstruction.eu

2. ed merrow presentation

Documents

new projects

thirds of large projects

iled projects

percentsuccessful projects

projects ready

project cost

large categorywell

project management11costs