Driving Field Productivity Southeastern Construction Owners & Associates
Roundtable (SCOAR) Meeting
Presented by: Lara Keefer, PhD
January 29, 2015
CONFIDENTIAL 2 INDEPENDENT PROJECT ANALYSIS
Confidentiality Statement
This document and the information contained herein are proprietary
and the property of Independent Project Analysis, Inc., which
expressly reserves all copyright and other ownership rights in its
contents. Information about the subject matter, content, and structure
of this document is confidential and proprietary. Neither this
document nor any information contained herein may be disclosed
without the prior written consent of IPA. This document is not to be
copied or distributed without authorization.
CONFIDENTIAL 3 INDEPENDENT PROJECT ANALYSIS
• In early 2013, we observed a dramatic increase in labor costs; all-in wages jumped from ~$60 to $70 in just over 6 months
• Project announcements along the U.S. Gulf Coast (USGC) in response to shale oil and gas sparked much of the increase
• However, recent delays and cancelations have lessened the effect
• The magnitude of a US hot market is unknown, yet we need to be prepared
The Labor Market in the USGC Is Uncertain
CONFIDENTIAL 4 INDEPENDENT PROJECT ANALYSIS
FACT: Recent trends around real prices show
steady increase in the cost of capital projects.
The Perfect Storm?
CONFIDENTIAL 5 INDEPENDENT PROJECT ANALYSIS
FACT: Recent trends around real prices show
steady increase in the cost of capital projects.
FACT: Engineering quality is declining (driven by
aging-out of engineering talent) which is driving
increased problems in project execution.
The Perfect Storm?
CONFIDENTIAL 6 INDEPENDENT PROJECT ANALYSIS
1.25
1.35
1.45
1.55
1.65
1.75
2000 2002 2004 2006 2008 2010 2012
Nu
mb
er
of
En
gin
eers
(m
illio
ns)
Year
The US Is Losing Engineering Resources
Source: US Department of Labor Bureau of Labor Statistics
CONFIDENTIAL 7 INDEPENDENT PROJECT ANALYSIS
• Experience is falling rapidly because of engineering workforce demographics
• Lack of engineering experience is translating into lower quality engineering design
‒ Owners have mostly been able to identify and correct engineering quality problems before they show up in the field
‒ However, frequency of basic design errors in vessel sizing, pipe stress calculations, and other core tasks is increasing
• Combination of declining owner and contractor experience will eventually lead to projects failing in execution or operation
Engineering Quality Continues to Degrade How Does This Relate to Field Labor?
CONFIDENTIAL 8 INDEPENDENT PROJECT ANALYSIS
FACT: Recent trends around real prices show
steady increase in the cost of capital projects.
FACT: Engineering quality is declining (driven by
aging-out of engineering talent) which is driving
increased problems in project execution.
FACT: We are heading into a period of increased
capital activity in the US where labor demand
may outstrip labor supply.
The Perfect Storm?
CONFIDENTIAL 9 INDEPENDENT PROJECT ANALYSIS
Announced Spending for Large Projects in the U.S.
0
10
20
30
40
50
60
70
80
2000 2005 2010 2015
Yearly C
apital S
pe
nd (
$B
B)
IPA Database ($2013) As Announced
Projects entering FEL 2
after 2014 have yet to
be announced
IPA
CONFIDENTIAL 10 INDEPENDENT PROJECT ANALYSIS
Severe Accidents Tripled in the Hot Market
DART = Days away from work, job restrictions, transfers, and fatalities
For a large project
with 1 million safety
hours
Pre-hot market
projects experienced
less than one DART
Hot market projects
experienced just
over two DARTs
Prob > χ2 = 0.0002
CONFIDENTIAL 11 INDEPENDENT PROJECT ANALYSIS
FACT: Recent trends around real prices show
steady increase in the cost of capital projects.
FACT: Engineering quality is declining (driven by
aging-out of engineering talent) which is driving
increased problems in project execution.
FACT: We are heading into a period of increased
capital activity in the US where labor demand may
outstrip labor supply.
CONVERGENCE: The implication is even higher
capital cost and significantly poorer safety.
We risk losing the license to operate.
The Perfect Storm?
CONFIDENTIAL 12 INDEPENDENT PROJECT ANALYSIS
• Strategies to manage the stresses on the
construction labor market:
• All these strategies add cost to a project relative
to typical project environment
• But, given the project context, each decision is
based on a cost / benefit analysis
Weathering the Storm Labor Risk Mitigation
INCREASING
THE SUPPLY SIDE
Training Programs
Importing Labor
Paying Per Diems
etc.
.
.
DECREASING
THE DEMAND SIDE
Pre-fabricated equipment
Modular construction
Resource leveling
etc.
.
.
CONFIDENTIAL 13 INDEPENDENT PROJECT ANALYSIS
• Improving field labor productivity benefits both sides of
the cost / benefit equation
Fewer hours per task, fewer hours per quantity
Doing more with less
• Improved productivity is the least costly way to address
the labor supply chain weakness
• Improved productivity can be achieved through more
rigor in work processes
• This talk will focus on what IPA research shows are the
drivers of better field productivity
Productivity Improvement as Labor Risk Mitigation Strategy
CONFIDENTIAL 14 INDEPENDENT PROJECT ANALYSIS
Agenda
Introduction
Who is IPA?
Labor Productivity in a Hot Market
Improving Labor Productivity
CONFIDENTIAL 15 INDEPENDENT PROJECT ANALYSIS
• IPA studies capital projects as a field of empirical research for over 25 years
• IPA employs a unique business model based on face-to-face meetings with the teams to assure data quality
• IPA has a database containing project data on over 16,000 projects from process industries (oil and gas, refining, pipelines, chemicals, consumer products, pharmaceuticals, minerals, power, paper, etc.)
• IPA employs about 250 staff members world wide
• IPA is a global company with offices in the US, Brazil, The Netherlands, UK, Singapore, Australia, and China
Who is Independent Project Analysis (IPA)?
CONFIDENTIAL 16 INDEPENDENT PROJECT ANALYSIS
• IPA evaluates about 800 major projects each year for companies
around the world with all data collected in person by IPA analysts
• We evaluate:
‒ The quality and completeness of the business case and commercial
arrangements
‒ The competitiveness of the project at the end of scope development
‒ The readiness of the project for sanction
‒ The execution practices employed during engineering and construction
‒ The relative success of the project after startup
• We develop a very complete technical, business, and people history
of each project from front-end through early operation
• These histories become the data that we use to find what works and
what doesn’t work in capital projects
What IPA Does
CONFIDENTIAL 17 INDEPENDENT PROJECT ANALYSIS
IPA’s Approach: Use the Data to Determine Best Practices
Controlling for: Project Characteristics, Scope, and Technology
Operability
Schedule
Cost
Parametric
Statistical
Techniques
Safety
Reserves Volatility
(E&P / Mining)
Project Inputs
Business Case/
Development
Strategies
Technological
Innovation
Front-End
Loading
Functional
Representation/
Integration
Project
Management
Practices
Project Practices That Demonstrate
Significant Relationship With
Outcome Performance Metrics
CONFIDENTIAL 18 INDEPENDENT PROJECT ANALYSIS
Clients Represented in IPA’s Databases
Abbott Laboratories
Abitibi-Price
Access Midstream
ADNOC
Agip KCO
AGRA Simons
Agrium
Air Liquide
Air Products
AkzoNobel
Alcoa
Alyeska
Anadarko
Anglo American
AngloGold Ashanti
Antofagasta Minerals
Arkema
AstraZeneca
Athabasca Oil
Atlantic LNG
AVR
AWE
BAPCO
Barrick
BASF
Bashneft
Bayer
BC Hydro
BG Group
BHP Billiton
Bluescope Steel
Boise
Borealis
BP
Braskem
Bristol-Meyers Squibb
Cairn India
Caltex
Canpotex
Cargill
Chevron
Chevron Phillips Chemical
China Three Gorges Project
Development Corp.
CITGO
CNOOC
CNRL
Codelco
Colonial Pipeline
ConAgra
Conoco Phillips
Constellium
Cosan Biomassa
CSR
Dana Petroleum
De Beers
Dominion
Dow
Dow Corning
DuPont
Eastman Chemical
Ecopetrol
Eli Lilly
Enbridge
EnCana
Eni Petroleum
Entergy
Eskom
Evonik Industries
ExxonMobil
Flint Hills
Florida Power & Light
FMC
Freeport LNG
Freeport-McMoran
GASCO (Abu Dhabi Gas)
Gazprom Neft
GDF Suez
Genentech
George Weston Foods
Georgia-Pacific
Gerdau
GlaxoSmithKline
GS Caltex
Noble Energy
Norsk Hydro
Nova Chemicals
Novartis
Novus
Numico
Nynas
Oando
Odebrecht Agroindustrial
OMV
Orica
Origin Energy
Pacific Energy Partners
PDVSA
PEMEX
Pertamina Hulu Energi
Petrobras
Petro-Canada
PetroChina Petroleum
Petroleum Development Oman
PETRONAS
Phillips 66
Pioneer Natural Resources
Praxair
Premier Oil
Procter & Gamble
PTT Group
Qatar Petroleum
Quadra FNX
Reliance E&P
Repsol
Rio Tinto
RockTenn
Roc Oil
Rohm and Haas
RWE
SABIC
Samarco
Sanofi Pasteur
Santos
Sasol
Saudi Aramco
Saudi Electric
Hess
Hoffmann-La Roche
Honeywell
Husky Oil
Incitec-Pivot
INEOS
INPEX
International Paper
Invista
Irving Oil
Johnson & Johnson
Kellogg
Kimberly-Clark
Kinder Morgan
Kinross Gold
Koch Industries
Kraft
Kuwait Nat’l Petroleum
Lanxess
Laricina Energy
London City Airport
Lukoil
Lundin Norway
LyondellBasell
Maersk
Manabi
Marathon Oil
Marathon Petroleum
MeadWestvaco
Melbourne Airport
Merck
MillerCoors
Milliken Chemical
Mineração Serra Verde
Mineração Usiminas
Miro
Mosaic
Motiva
Mubadala
NaiKun Wind Energy
Nederlandse Gasunie
Newmont
Nexen
Shell
Sibur
Singapore Economic
Development Board
Singapore Refining Co.
S-OIL
Solvay
Southern California Edison
Southern Company
Staatsolie Suriname
Star Petroleum Refining Co.
Statoil
Stepan
Suncor Energy
Sunoco
Syncrude
Talisman Energy
Tennessee Valley Authority
Tengizchevroil (TCO)
Tesoro
Texas LNG
Total
TPC Group
TransCanada
UK Government
US Department of Defense
US Department of Energy
US Department of State
US Gypsum (USG)
US Steel
Vale
Valero
Vetra Group
Votorantim Metais
Wacker
Westlake
Williams
Wintershall
Woodside
Xstrata
Yara
YPF
CONFIDENTIAL 19 INDEPENDENT PROJECT ANALYSIS
Example of IPA Data on US Productivity
CONFIDENTIAL 20 INDEPENDENT PROJECT ANALYSIS
Example of IPA Data on USGC Productivity
Baton Rouge
Baytown
Beaumont
Borger
Channelview
Chocolate Bayou
88
127
67
63
70
36
Convent
Deer Park
Freeport
Geismar
Houston
La Porte
41
170
127
99
132
98
Lake Charles
Norco
Orange
Pasadena
Plaquemine
Port Arthur
147
122
66
105
56
109
Sweeny
Texas City
Victoria
80
185
40
CONFIDENTIAL 21 INDEPENDENT PROJECT ANALYSIS
• We collect the wage make-up for all-in wages and productivity on each project we analyze
• We compare these data and analyze variance
• What we have learned:
‒ Basic skills levels determine the raw material for productivity
‒ But management determines what you really get
‒ For projects in the same place at the same time with the same
labor pool, the variation around craft productivity is +/- 25
percent on a single standard error
• This means there is a lot to be made with better management
Productivity is Management-Driven
CONFIDENTIAL 22 INDEPENDENT PROJECT ANALYSIS
Agenda
Introduction
Who is IPA?
Labor Productivity in a Hot Market
Improving Labor Productivity
CONFIDENTIAL 23 INDEPENDENT PROJECT ANALYSIS
0.80
0.90
1.00
1.10
1.20 C
onstr
uction P
roductivity I
ndex
Yearly Moving Average
Construction Productivity Deteriorated in the Hot Market
BE
TT
ER
W
OR
SE
Hot Market
CONFIDENTIAL 24 INDEPENDENT PROJECT ANALYSIS
• Labor productivity was the proximate cause of failures in past hot markets, but not the root cause
‒ It is a symptom of much deeper problems
‒ Poor construction management contributed to the problem but also did not cause it
‒ Poor controls also exacerbated, but did not cause, the problem
• Engineering problems were (and always will be) the principal cause of poor craft productivity
Labor Productivity Was Not the Root Cause
24
CONFIDENTIAL 25 INDEPENDENT PROJECT ANALYSIS
• Engineering started earlier
‒ Projects increased overlap of engineering and definition in hot market
‒ Scope was not closed when long leads were ordered
• Vendor data were frequently late (driven by changes)
• Engineering slipped more
• Construction started on time (before engineering was half done)
• Labor productivity was poor
• Construction slipped more
Project Behavior in a Hot Market
CONFIDENTIAL 26 INDEPENDENT PROJECT ANALYSIS
The Downward Productivity Spiral
Falling Behind in
Field
Add (poor) Labor,
degrading existing
Late Permits
Incomplete Scope
and FEL
Late Engineering
Poor Quality Engineering
Premature Field Start
Overextended
Engineering Contractors
Tight Engineering Schedules
Poor Controls
Late Materials
Poor Labor Productivity
Schedule-driven
Businesses
CONFIDENTIAL 27 INDEPENDENT PROJECT ANALYSIS
Agenda
Introduction
Who is IPA?
Labor Productivity in a Hot Market
Improving Labor Productivity
CONFIDENTIAL 28 INDEPENDENT PROJECT ANALYSIS
• Performance in the field is heavily influenced by what precedes construction
• Understanding front-end practices (design, planning, and controls) can provide a more systematic way of addressing labor risk
Practices That Improve Labor Productivity
CONFIDENTIAL 29 INDEPENDENT PROJECT ANALYSIS
0.90
1.00
1.10
1.20
1.30
1.40
Co
st
Ind
ex
Front-End Loading Index at Sanction
Hot Markets Increase the Cost Penalty of Poor FEL
Wo
rse
B
ett
er
INADEQUATE POOR FAIR GOOD BEST
CONFIDENTIAL 30 INDEPENDENT PROJECT ANALYSIS
0.90
1.00
1.10
1.20
1.30
1.40
INADEQUATE POOR FAIR GOOD BEST
Co
st
Ind
ex
Front-End Loading Index at Sanction
Normal Market
Hot Market
Hot Markets Increase the Cost Penalty of Poor FEL
Wo
rse
B
ett
er
CONFIDENTIAL 31 INDEPENDENT PROJECT ANALYSIS
Site
Definition
Engineering
Definition
Project
Execution
Plan
IPA’s Front-End Loading Index A Measure of Execution Risk
CONFIDENTIAL 32 INDEPENDENT PROJECT ANALYSIS
• In USGC, industry record on site definition tends to be better than other locations
• However, hot markets put more pressure on projects to follow every step, look at every deliverable
‒ Not form over substance!
• Environmental permitting can be a surprise in a hot market
‒ Permit durations grew 300-400%
• Final HAZOPs provide an opportunity to slow down
Site Definition In a Hot Market
CONFIDENTIAL 33 INDEPENDENT PROJECT ANALYSIS
Site
Definition
Engineering
Definition
Project
Execution
Plan
Measuring Engineering Definition at Authorization Both the “What” and “Who” Matter
CONFIDENTIAL 34 INDEPENDENT PROJECT ANALYSIS
• The quality and completeness of the basic design package are drivers of how reliable the quantity take-offs can be, which, in turn, directly relates to the labor hours required
• IPA measures engineering definition as an element of Front-End Loading using the following ratings:
‒ Screening Study
‒ Limited Study
‒ Advanced Study (Best Practical)
‒ Full Design
Quality of Engineering Definition
34
* The appendix includes the engineering rating definitions
CONFIDENTIAL 35 INDEPENDENT PROJECT ANALYSIS
0%
5%
10%
15%
20%
25%
30%
35%
Full
Design
Quality of Engineering Definition Drives Labor Hour Growth and Changes
La
bo
r H
ou
r G
row
th
Wo
rse
B
ett
er
= +14%
*Advanced
Study Limited
Study Screening
Pr < 0.001
*Best Practical at Authorization Controlled for Multiple Factors
CONFIDENTIAL 36 INDEPENDENT PROJECT ANALYSIS
Site
Definition
Engineering
Definition
Project
Execution
Plan
Fully Define the Execution Schedule to Improve Field Productivity
CONFIDENTIAL 37 INDEPENDENT PROJECT ANALYSIS
• Project teams attempt to shorten schedules in a number of ways
• One of the most common is to increase the overlap between the engineering and construction phases
• If field mobilization begins with insufficient design or lagging procurement, field productivity is eroded and labor hours grow
Driving Schedule Hurts Labor Productivity
CONFIDENTIAL 38 INDEPENDENT PROJECT ANALYSIS
0%
10%
20%
30%
40%
50%
Overlap Between Engineering and Construction Larger Projects Are Hurt More
Wo
rse
B
ett
er 20 Percent Average
Overlap
30 Percent Average
Overlap
40 Percent Average
Overlap
Lab
or
Ho
ur
Gro
wth
$50 MM $250 MM $500 MM
Controlled for Multiple Factors
CONFIDENTIAL 39 INDEPENDENT PROJECT ANALYSIS
Project Controls Reduce Schedule Slip
0%
10%
20%
30%
40%
50%
6 5 4 3 2 1 0
Execu
tio
n S
lip
Project Control Index
Deficient Poor Fair Good
P r < 0.0001
* Controlled for FEL
Physical Progressing of Both Engineering and Field Labor Improves Performance
CONFIDENTIAL 40 INDEPENDENT PROJECT ANALYSIS
• It is likely that the US labor market will be constrained in the coming years
• There are several strategies to address the risk of labor shortages
• One key strategy is improving labor productivity: getting more from less
• There are early levers – focused on rigor in the front end process – that you can turn to achieve better productivity in the field
Conclusion
CONFIDENTIAL 41 INDEPENDENT PROJECT ANALYSIS
Practices That Improve Labor Productivity
Practices That Reduce Field Hours
In Project Team Control in a Hot
Market?
High Skill Craft Labor NO
High Skill Supervision NO
Best Practical Engineering Definition YES
Fully Defined Execution Schedule YES
Non-Aggressive Schedule / Overlap YES
Effective Controls / Physical Progressing YES
No Scope Changes YES
Hot markets are less forgiving of early errors
and oversights.
Follow your work process!
CONFIDENTIAL 42 INDEPENDENT PROJECT ANALYSIS
42
Thank you for your attention