Getting Overruns Under Control

By George F. Jergeas, Ph.D., P.Eng.
Professor of Project Management Specialization
University of Calgary

Megaprojects in the oil and gas industry typically involve capital investment of $8-10 billion and highly specialized teams of engineers, manufacturers, contractors, laborers and support staff. So, with all that expertise in the mix, why is it so common for these projects to run over budget by as much as 100%?

A 2002 study, conducted for the Government of Alberta by Bob McTague of Hatch and Dr. George Jergeas of the University of Calgary, found that cost and schedule overruns on large oil and gas construction projects were the compounded effect of management deficiencies in virtually all aspects of planning and operations. Five years later, another investigation by Dr. Jergeas shows that huge overruns continue to be a major challenge facing the industry. The solution lies in leadership, knowledge and realism. Some of the key areas are discussed below.

Misplaced optimism

There is a general under-appreciation for the complexity, interdependencies and risks associated with the megaproject environment. Many risks are strategic and fall outside the control of the project management team.

Most oil and gas megaprojects are in remote locations. The cost of attracting and maintaining on-site labor (including camp development, operations and personnel transport costs) is often underestimated. Alternative regional and national demands restrict the availability of craft labor and put upward pressure on wages as an incentive to relocate. There are also real productivity losses associated with working in cold climates and shorter daylight hours in northern regions.

Misguided objectives

Much of the problem starts with inadequate front end loading or incomplete definition of project scope, design/executional requirements or risk/alternative analyses. The recent trend toward project fast-tracking, for example, often means that appropriate planning time is traded for ambitious building speed. When clients and engineering firms push work into the field early, construction contractors must deal with unrealistically compressed schedules. Overtime wages, materials and equipment expenses all increase. Also, given the long duration of most megaprojects, it is common for customer and other stakeholder requirements to change over a project's lifecycle – yet, there is a lack of understanding of the cumulative impact of these scope changes. Deviations from the plan are simply costly.

Misaligned strategies

Some project strategies deployed do not properly consider the level of scope definition, the fast-track nature of the megaproject environment, market condition, owner participation control and risk. Additional cost overruns result from late consideration of:

• Project management strategies such as risk management, project control, communications, organization and responsibilities.
• Contract strategies relating to management, design, construction and commissioning services.
• Design strategies such as contributions from client business, operation, project team, contractors and suppliers.
• Procurement strategies including preferred suppliers, progressing, inspection and expediting, storage, spares and documentation.
• Construction strategies such as site layout, power, utilities and drainage, off-site prefabrication and assembly, industrial relations.
• Commissioning strategies including schedule and integration with construction, training and validation, engineering and trade support, and provision of operating materials.

Misdirected execution

If engineering or material delivery takes longer than scheduled, construction is forced to make up lost time. Alternatively, when a project is fast-tracked, construction problems arise that are the result of inadequate engineering or design planning. While construction often bears the brunt of blame for overruns, the expectations and pressures are unrealistic and misplaced. Notwithstanding, there are mismanagement issues within the construction discipline itself:

• Inexperienced or poorly equipped project management personnel and supervisors coupled with the inability to understand, plan, adapt or implement project management procedures or systems.
• Lack of standardization and fit-for-purpose including inadequate use of shop fabrication, modularization strategy and constructability reviews.
• Poor communication, team work and alignment between the players leading to adversarial relationships and protracted disputes.
• Poor site organization and layout leading to excessive time wastage and productivity loss during construction.

Joint venture (JV) of project partners, contractors and engineering firms that are not aligned to work effectively due to different cultures, internal JV conflicts and diverging visions of the way that the EPC project should be structured and managed.

Missing links

Learning from all these experiences, many megaproject owners and EPCM contractors are now investing more in cost, project and supply-chain management expertise, and quality/training programs such as Six Sigma to improve and synchronize their planning, budgeting and operations processes. Other evolving solutions include a preference for closer working relationships with fewer companies throughout the supply chain (in order to reduce costly redundancies in bidding and coordination activities), performance contracts, greater management team continuity, more centralized decision-making authority and more realistic inter-disciplinary and inter-company communication.

The goal, of course, is to close the gap between top-level objectives at the beginning and the realities of front-line engineering and construction through to the end. Keys to project success can be summarized as follows:

• Effective early planning, including early involvement of key contractors and suppliers, proper project governance, clear definition of decision-making responsibilities and the development of a comprehensive execution plan.
• Critical issues and risk identification, including early identification and management of local and global issues, stewardship of mitigation plans and proper strategies for sharing risks (e.g., contracting arrangements, use of the international market place, harmonizing stakeholder goal, supply chain relationships).
• Early definition of scope that allows development of achievable budget and schedule and without rushing into construction prematurely.
• Appropriate contracting strategies such as the use of a program management contractor, interface management for multiple large contracts, lump sum versus reimbursable compensation, effective work breakdown structure and early contractor evaluation and selection.
• Proper execution strategy that considers the applicability of phased execution, use of modularization, early identification of constraints such as engineering, human resources, supervision, camp, logistics and material delivery.
• Construction planning and management that consider plot layout and work sequencing, construction infrastructure planning and labour productivity enhancement.

For further information, please contact:

Dr. George Jergeas
Project Management Specialization, Dept. of Civil Engineering
Schulich School of Engineering, University of Calgary, Alberta, Canada
+1 403 220 8135
jergeas@ucalgary.ca