ECIs 23rd Annual Conference 2012 The European Construction Industry

Facing the Global Challenges

26 & 27 April 2012 Hilton Hotel, Dusseldorf

Industrial Megaprojects
Concepts, Strategies and Practices for Success
Ed Merrow
President & CEO Independent Project Analysis, Inc. (IPA)

Our 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

Our 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

Some 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?

Outline
The Data The results of large industrial projects The proximate and root causes of failures Implications for project management

Research Database Description

Characteristics
Number of Projects Project Cost (in millions 2011 US$) Average Authorization Year Average Execution Duration (months) Percent of Projects with Any New Technology Number of Owners Represented Megaprojects Database 318 $3,250 2005 43 36% 77

Industries Represented

Other 2% Distribution 2% Power Generation 3%

Oil & Gas Production 41%

LNG 8% Petroleum Processing 21% Mining, Minerals & Metals 15%

Chemicals 10%

Geographical Distribution of Megaprojects

Canada 7% Europe 15% Central Asia 4%

United States 13% Asia 9%

Middle East 15% South America 19%

Africa 9% Australia 9%

CONFIDENTIAL

INDEPENDENT PROJECT ANALYSIS

Outline
The Data

The results of large industrial projects

The proximate and root causes of failures Implications for project management

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Defining Success and Failure

We deem a project to be a failure if one or more of the following occurred:
Costs grew (real) Schedule Slipped Overspent (Absolute Measure) Execution time (Absolute Measure) Severe and Continuing Operational Problems into Year 2 after startup 25% + 25% + 25% + 50% + Failure Rate
100% 90% 80% 70%

Megaprojects
60% 50%

Yes

40% 30%

Projects <$500 MM

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

20% 10% 0%

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Megaprojects Split Into Radically Different Groups

COST INDEX
1.3

Failed Projects (65 percent) Successful Projects (35 percent)

1.2

COST GROWTH
40% 30% 20% 10% 0%

1.1

PRODUCTION
1.0 100% 0% 80% 60%

1.0

10%
1.1

20%
1.2

EXECUTION SCHEDULE INDEX

CONFIDENTIAL

30%
1.3
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EXECUTION SCHEDULE SLIP

INDEPENDENT PROJECT ANALYSIS

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

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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

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Outline
The Data The results of large industrial projects

The proximate and root causes of failures

Implications for project management

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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

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The Project Objectives Problem

Coherent project objectives are the foundation on which a strong project 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 Objectives
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Only a Slight Difference in Clarity of Business Objectives Between Megas and Non-Megas
70

Percent of Projects

Under $500MM
60 50 40 30 20 10 0
Very Fairly

Megaprojects

Somewhat

Unclear

Team Understanding of Project Business Objectives at Sanction

CONFIDENTIAL 18 INDEPENDENT PROJECT ANALYSIS

But Differences in Effects Are Huge

80

Percent of Successful Projects

70 60 50 40 30 20 10 0
Very

Under $500MM

Megaprojects

Fairly

Somewhat

Unclear

Team Understanding of Project Business Objectives at Sanction

CONFIDENTIAL

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INDEPENDENT PROJECT ANALYSIS

Trade-offs Are Less Clear for Megas

<$500MM
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Megas

Percent of Projects

40 35 30 25 20 15 10 5 0 Very Clear Fairly Somewhat Unclear

Team Understanding of Cost/Schedule/Operability Trade-offs

CONFIDENTIAL

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INDEPENDENT PROJECT ANALYSIS

Team Integration Is a Necessary Condition for Effective FEL

Missing critical functions during FEL damages quality and completeness of the front-end work
45% 40%

Projects Without Integrated Teams Projects With Integrated Teams

Percent of Projects

35% 30% 25% 20% 15% 10% 5% 0%

Best Good Fair Poor Miserable

FEL Index
CONFIDENTIAL 21 INDEPENDENT PROJECT ANALYSIS

Turnover of the Project Leader Hurts

But It Destroys Megaprojects
40%

Effect of PM Turnover on Project Failure Rate

35% 30% 25% 20% 15% 10% 5% 0%

$10MM $25MM $25MM $100MM $100MM $250MM $250MM $500MM Megaprojects

Project Size
Leadership Turnover
CONFIDENTIAL 22 INDEPENDENT PROJECT ANALYSIS

Larger Projects Experience More Frequent Project Manager Turnovers Even After Controlling for Schedule
50%

Percent of Projects that Experience Project Manager Turnover

Turnover rate in Megaprojects

45%

40%

35%

30%

25% 10 50 100 150 200 250 300 350 400 450 500

Cost 2011$ (million)

CONFIDENTIAL 23 INDEPENDENT PROJECT ANALYSIS

Project Director Turnover Relates to All Outcome Metrics

COST INDEX
1.40 1.30 1.20

Turnover No Turnover

COST GROWTH

1.10 40% 30% 20% 10% 0% 0.90 1.00 1.10 20% 1.20 1.30 30% 40% 0.90 10% 0% 10% 20% 30% 1.00 40% 50%

PRODUCTION FAILURES 60%

SCHEDULE INDEX
CONFIDENTIAL

1.40

SCHEDULE SLIP
INDEPENDENT PROJECT ANALYSIS

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

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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

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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

Front-End Loading
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FEL is Most Important for Megaprojects

40%
Megaprojects

Effect of FEL on the Cost Index

30%

Note that FEL is also crucial for even largish projects

250 - 500

20%
100 - 250 <100MM

10%

0%

Best Practical BEST

Good GOOD

Fair FAIR

Poor POOR

Screening MISERABLE

FEL Index

CONFIDENTIAL

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INDEPENDENT PROJECT ANALYSIS

How Well Are Megaprojects Defined at Authorization?

70% 60%

Percentage of Projects

50% 40% 30% 20% 10% 0%

BEST

GOOD

FAIR

POOR

MISERABLE

FEL Index

CONFIDENTIAL

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INDEPENDENT PROJECT ANALYSIS

What Difference Does it Make?

Percent in Group
70%

Percent Successful in Group

Percentage of Projects

60% 50% 40% 30% 20% 10% 0%

BEST
GOOD FAIR POOR MISERABLE

FEL Index

CONFIDENTIAL

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INDEPENDENT PROJECT ANALYSIS

Objectives, Team Integration, and FEL

Miserable

Team Is Not Integrated Team Is Integrated

Pr < 0.91 Pr < 0.0001

FEL Index

Best

Good

Fair

Poor

Very Clear

Fairly Clear

Somewhat Clear

Not Very Clear Not Clear At All

Source: Industrial Megaprojects

CONFIDENTIAL

Clarity of the Objectives

31 INDEPENDENT PROJECT ANALYSIS

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

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Practices Drive But Do Not Really Explain

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?

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Root Causes

Why Do Practices Degrade on Large Projects?

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

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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

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Mamas, dont let your babies grow up to be cowboys!

Willie Nelson

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Outline
The Data The results of large industrial projects The proximate and root causes of failures

Implications for project management

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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

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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

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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

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Thank you for your Attention!

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European Construction Institute www.europeanconstruction.eu

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