Overview of the Global Project LandscapeAdvanced Work Packaging Conference 2014

October 7, 2014Houston, Texas

Stephen P. Mulva, Ph.D.Associate Director, CII

Dr. Stephen P. Mulva

• Associate Director of the Construction Industry Institute; University of Texas at Austin

• Lecturer, Researcher, and Consultant in the benchmarking of capital projects

• Program Management Expert• Former employee of Fluor

(Constructability Coordinator and Field Engineer), Phillips Petroleum, Bechtel, ePM, and Texas State University

Construction Productivity Decline

Productivity Index (1964-1999)(Constant $ of contracts / workhours of hourly workers)Sources: U.S. Bureau of Labor Statistics, U.S. Dept of Commerce

All Non-Farm Industries +1.71%

Construction Industry-.48%

Source: Journal of Construction Engineering and Management(Sept./Oct. 2001)

Actual / Estimated Peak Construction Workforce

Actual/ Estimated Peak Construction Workforce

Pro

ject

Cos

t G

row

th

3.02.52.01.51.00.50.0

1.2

1.0

0.8

0.6

0.4

0.2

0.0

-0.2

-0.4

PROJECT PERFORMANCE PREDICTABILITY RESEARCH(IMPACT ON FINANCIAL RETURNS)

CII Owners’ Capital Efficiency(Ratio of Cash Flow (CFfOA) to Construction In Progress (CIP))

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

3.8

4.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

CAfO

A/CI

P

Year

2.53 (2012)

3.68 (1999)

N=64Early 1990sRecession

Early 2000sRecession

Late 2000sRecession

Correlation between Construction In Progress (CIP) and Cash Flow (CFfOA) for CII Owners

R² = 0.88

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Corre

latio

n Co

effic

ient (

betw

een

CIP

and

CFfO

A)

Year

95.2% (1991)

20.2% (2008)

N=64

CII Owners’ Weighted Average Cost of Capital (WACC)

R² = 0.7079

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Weig

hted

Ave

rage

Cos

t of C

apita

l (%

)

Year

Avg. WACC = 8.2%

N=64

Capital Project Performance - CII Owners

Project Cost Growth

Owner (NTotal=975)

-10% 10%

10%

-10%

-3.0% 3.0%

2.7%

-2.7%

Project Schedule Growth

N=310 (31.8%)Avg. Cost Growth = -10.2%Avg. Schedule Growth = 29.1%

N=239 (24.5%)Avg. Cost Growth = 16.2%Avg. Schedule Growth = 32.0%

N=102 (10.5%)Avg. Cost Growth = 12.3%Avg. Schedule Growth = -9.8%

N=271 (27.8%)Avg. Cost Growth = -12.7%Avg. Schedule Growth = -8.2%

N=53 (5.4%)Avg. Cost Growth = -0.47%Avg. Schedule Growth = 0.24%

69.7% Projects Not Shown

Cash Flow for an “Average” CII Owner Project

-$5 M

-$20 M

-$40 M

$9.5 M

$14.4 M

-$50

-$40

-$30

-$20

-$10

$0

$10

$20

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034

Cash

Flo

w ($

Milli

on)

Year

“Average” CII Owner Project = $65 Million

Slope of Revenue = 2.7% per year(Incremental Rate of Corporate CFfOA)

IRR = 14.1%

20 years

Startup

CII Calculated Hurdle Rate For Industrial Projects

“Average” CII Owner Projected Cash Flow

(Morningstar Estimated Hurdle Rate for Oil and Gas Companies = 14.7%)

Cash Flow Diagram for an “Average” CII Owner(Includes Forecast 2012 - 2016)

Predicted CIP

Predicted CFfOA

UCL_CIP

LCL_CIP

LCL_CFfOA

UCL_CFfOA

-$4,000

-$3,000

-$2,000

-$1,000

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Cash

Flo

w ($

Milli

on)

Year

CIP CFfOA Predicted_CIP Predicted_CFfOA

$ 4.107 Billion(2012)

-$ 2.165 Billion(2012)

Source: Capital IQ Courtesy of McCombs School of Business, UT Austin

Cost Growth = 16.2%Schedule Growth = 32.0%

-$4,000

-$3,000

-$2,000

-$1,000

$0

$1,000

$2,000

$3,000

$4,000

$5,000

2011 2012 2013 2014 2015 2016 2017 2018

Cash

Flo

w ($

Milli

on)

Year

$4,017 M $4,155 M $4,292 M $4,430 M $4,567 M

-$2,165 M -$2,268 M -$2,372 M -$2,476 M -$2,579 M

Scenario 1: High Cost and Schedule Growth

-$4,000

-$3,000

-$2,000

-$1,000

$0

$1,000

$2,000

$3,000

$4,000

$5,000

2011 2012 2013 2014 2015 2016 2017 2018

Cash

Flo

w ($

Milli

on)

Year

$4,017 M $4,155 M $4,292 M $4,430 M $4,567 M

-$2,516 M -$2,635 M -$2,756 M -$2,877 M -$2,997 M

NPVTarget= $7.6 Billion NPVScenario 1= $5.7 Billion25.3% Loss of NPV

As-Is Cash Flow

To-Be Cash Flow

Cost Growth = -12.7%Schedule Growth = -8.2%

Scenario 2: Low Cost and Schedule Growth

-$4,000

-$3,000

-$2,000

-$1,000

$0

$1,000

$2,000

$3,000

$4,000

$5,000

2011 2012 2013 2014 2015 2016 2017 2018

Cash

Flo

w ($

Milli

on)

Year

$3,507 M $3,627 M $3,747 M $3,867 M $3,987 M

-$1,890 M -$1,980 M -$2,071 M -$2,162 M -$2,251 M

NPVTarget= $7.6 Billion NPVScenario 2= $6.8 Billion11.1% Loss of NPV

To-Be Cash Flow

-$4,000

-$3,000

-$2,000

-$1,000

$0

$1,000

$2,000

$3,000

$4,000

$5,000

2011 2012 2013 2014 2015 2016 2017 2018

Cash

Flo

w ($

Milli

on)

Year

$4,017 M $4,155 M $4,292 M $4,430 M $4,567 M

-$2,165 M -$2,268 M -$2,372 M -$2,476 M -$2,579 M

As-Is Cash Flow

Project Cost Growth

Owner (NTotal=975)

-10% 10%

10%

-10%

-3.0% 3.0%

2.7%

-2.7%

Project Schedule Growth

Net Present Value (Forecast for 2012-2016)

NPV = $ 6.4 Billion NPV = $ 5.7 Billion

NPV = $ 6.6 BillionNPV = $ 6.8 Billion

NPV = $ 7.7 BillionTarget

Expected NPV = $ 6.5 Billion

NPV Impact of Suggested P.M. Practices

• Best Strategy to Maximize Expected NPV– Lump Sum Contract, Working with CII Contractor, PDRI<=200, and High

Use of Planning for Startup

– Expected NPV can increase $496 Million– Expected NPV can decrease $2,113 Million

Practices Expected NPV Gain/Loss Improvement

CII Owners’ Average $ 6.45 Billion N/A N/A

Contract MethodLump Sum $ 6.81 Billion $ 360 Million 5.5%

Cost Reimbursable $ 5.50 Billion - $ 950 Million -14.8%

Working RelationshipWork w/ CII Contractor $ 6.80 Billion $ 350 Million 5.3%

Work w/ Non-CII Contractor $ 4.61 Billion - $ 1,840 Million -28.5%

PDRI<=200 $ 6.48 Billion $30 Million 0.5%

>200 $ 6.10 Billion - $360 Million -5.6%

Planning for StartupHigh Use $ 6.45 Billion $ 0 Million 0.0%

Low Use $ 6.23 Billion - $220 Million -3.4%

496$)0($)30($)350($)360($ 2222 Million

Opportunity Exists To Improve

Target NPV

Expected NPV

B.P. Enhanced NPV

Optimal NPV

$7.65 B

$6.45 B

$6.95 B

$8.00 B

KNOWN

UNKNOWN(RESEARCH)

PROJECT PHASE PERFORMANCE RESEARCH(IMPACT ON SCHEDULE)

CII Phase Duration Research (2011-Present)

• Normalized $250 MM Projects• C/R (Blue) vs. L/S (Red) Contracting

Procurement Involvement in FEP

35 Weeks

40 Weeks

Arrangement of Phases

Stop Mean

StartMean

LEGEND

PHASE

Stop Mean

StartMean

Duration in %Duration in %

Heavy Light

0.00% 0.31% 0.32% 0.55% 0.72% 0.96%0.92% 0.99%Heavy Light

0.78%0.00% 0.23%

0.24%0.26% 0.40% 0.56% 0.72% 0.78% 0.92% 0.99%

Overall Duration

Phase

Heavy  (D=0.32%)Light (D=0.24%)

Front‐End Planning

Design/Engineering

Procurement

Construction

Start‐UP

Heavy  (D=0.41%)Light (D=0.34%)

Heavy  (D=0.45%)Light (D=0.46%)

Heavy  (D=0.41%)Light (D=0.52%)

Heavy  (D=0.07%)Light (D=0.21%)

Engineering Phase

• Impact of Design Efficiency

74% p=0.063

5 Principles of Project Integration

• Work and Work Process• Organizational Engineering• Leadership and Governance• Communications and Information Flow• Business Environment and Culture

Communication and Information Flow

• Communicate Too Much or Not Enough?• Lines of Communication = (n(n-1))/2

# Project Team Members # Lines of Communication7 2115 10550 1225100 4950500 124750

Interface Mgmt. vs. Project Cost Growth

Mean: 0.18Standard Deviation: 0.38

Mean: 0.04Standard Deviation: 0.16

Formal IM (n=10)Informal IM (n=27)

p=0.25

Cos

t Gro

wth

• Formal IM projects had lower mean of cost growth and less standard deviation

Advanced Work Packaging?

Advanced Work Packaging?

Program(me) Management• The coordinated management of a portfolio of projects to

achieve a set of business objectives (CCTA 1995)

BusinessStrategy

CorporatePlanning

ProgramManagement

ProjectManagement

RiskMitigation

ChangeManagement

Change Management

Progress Reports

ProgramDefinitionPackage

ImplementablePrograms

Strategy Alignment

Economic/Risk ModelImplementable Programs

IT StrategyPlanning Policies

Political ConsiderationsCompliance Statements

Company Planning ObjectivesOther External Risk Factors

Program ConsiderationsCorporate Guidelines

Implementable ProjectsProgress Reports

Project Planning

AssetDevelopment

Process

Program ObjectivesRisk Model

Risk ModelProject Definition Package

ChangeManagement

PlansProgram

Objectives

BusinessStrategy

CorporatePlanning

ProgramManagement

ProjectManagement

RiskMitigation

ChangeManagement

Change Management

Progress Reports

ProgramDefinitionPackage

ImplementablePrograms

Strategy Alignment

Economic/Risk ModelImplementable Programs

IT StrategyPlanning Policies

Political ConsiderationsCompliance Statements

Company Planning ObjectivesOther External Risk Factors

Program ConsiderationsCorporate Guidelines

Implementable ProjectsProgress Reports

Project Planning

AssetDevelopment

Process

Program ObjectivesRisk Model

Risk ModelProject Definition Package

ChangeManagement

PlansProgram

Objectives

Programmatic Change Management• Change Management System

– Wal-Mart makes 170 changes per month to Supercenter prototype

Advanced Work Packaging!

© 2001; Boeing Corporation (DCAC/MRM Initiative)

Questions?

Stephen P. Mulva, Ph.D.Associate Director, CIIsmulva@cii.utexas.edu+1.512.232.3013