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The CPI Construction Boom: Project Delivery in a New Landscape

By Clay Gilge, KPMG |

Companies need more creative ways to deal with complex and ever-changing market and technical challenges

 

Low natural gas prices and high global demand for hydrocarbon-based chemicals have resulted in resurgence in the construction of new and existing chemical process plants in the U.S. Despite the positive growth environment, companies are taking a much more strategic approach to their capital investments as fluctuating consumer demands and commodity pricing make the future uncertain. As a result, CPI operating companies are considering a wide variety of options to remain competitive and agile, including geographic expansion and diversification of product lines.

These developments have directly impacted the planning, design and construction of new facilities. In the face of product innovations, geographic expansion and more flexible and adaptive facilities, CPI facility projects have become more complex and expensive than ever before. Gone are the days where an engineering, procurement and construction (EPC) project approach could successfully deliver a turnkey plant with minimal delay and cost overages. Companies need creative ways to meet both market challenges and the traditional challenges of any major capital project, and owners undertaking new plant projects need to address issues that weren’t top risks even five or ten years ago. These include:

  • Division of responsibilities for project oversight and management. Project activities and controls must be assigned appropriately to the individuals who are most qualified to manage and perform the task
  • Management of high volumes of transactional activity and documents. Today, the ability to process and analyze project information related to the project at a rapid pace is essential to leverage the performance trends to make informed decisions
  • Fraud and misconduct from project team or vendors. Vigilance is needed to reduce the risk associated with potential exposure to inappropriate activities from internal or external project stakeholders, such as bribes, embezzlement, bid rigging and more

Addressing these items will help to ensure that any new high-quality facility is delivered on time, on budget and without legal or reputational impact for the owner.

 

Hybrid project strategy

To achieve success in this ever-changing market, companies need to explore transitioning from the traditional, more hands-off EPC approach, to a delivery method that is much more direct — a hybrid approach, whereby the owner assumes increased responsibility for project performance and monitoring. Additionally, today’s operating companies must integrate technology solutions to support the project’s key control functions, such as cost and schedule reporting, forecasting, contracting, change control, materials management, payment administration, inspections and commissioning. Unlike the traditional EPC approach, a hybrid strategy (Figure 1) increases the number of direct vendor connections, purchase orders, contracts and management activities that are handled directly by the owner’s project-management department (as opposed to being handled directly by the EPC firm on the project).

FIGURE 1.  The diagram highlights the differences between these two delivery approaches

FIGURE 1. The diagram highlights the differences between these two delivery approaches

With the hybrid approach, the owner takes over many core project-management functions from the EPC contractor to maintain tighter control over project outcomes and to achieve greater cost savings. Resulting cost savings are primarily generated from the owner’s ability to leverage internal positions (existing or new) to offset the need for additional fulltime equivalents that would have been provided by the EPC firm. Additionally, with owner resources administering the key cost controls, specific focus can be maintained on shielding the entity from any unwarranted or unallowable cost escalation.

Using a hybrid approach to CPI plant projects, the owner is more involved throughout the life of the project and maintains a greater connection to project activities. As a result, the owner is able to make adjustments and modifications throughout the project lifecycle to achieve improved outcomes and reduce costs.

Although changes to a project are possible using a traditional EPC approach, modifications typically take more time and have a larger cost impact than in a hybrid approach. By segmenting work packages such as site work, process piping, and others in a hybrid approach, owners can maintain flexibility and address scope changes related to new equipment selections or fluctuations in labor and material pricing. Owners can also take advantage of lower-priced options for select elements of the project.

Historically, global chemical firms and other operating companies in the CPI have traditionally aligned themselves with top EPC firms to manage their large, capital-intensive construction and expansion projects. This traditional approach can alleviate many concerns and reduce risk to a degree, but it can also be costly. By contrast, the hybrid approach discussed here allows CPI operating companies to shape the project team and take advantage of lower pricing by the following:

  • Utilizing local engineering and construction resources. This allows the owner to engage contractors and consultants who are familiar with the regional construction requirements, workforce and customs
  • Purchasing major equipment directly without incurring EPC contactor markups. This allows the owner to leverage the firm’s internal procurement resources to negotiate favorable pricing and terms on many large mechanical components (such as turbines, pumps and compressors)
  • Supplementing the EPC contractor’s project-management team with internal staff or lower-priced, third-party resources. When the project owner is able to assemble an appropriate project team comprised of both internal and third-party contracted resources, they are often able to maximize efficiencies, reduce costs and ensure independent oversight

 

Managing risks

While the hybrid delivery model discussed here offers distinct advantages, increased owner involvement also invariably leads to greater exposure to many aspects of project performance. Without experienced project-management resources and strong project-delivery leadership, the owner’s potential risk exposure can grow. For instance, the hybrid approach will likely result in the owner holding multiple supplier contracts, including some with cost-reimbursable compensation terms for labor, overhead, materials, expenses and more. For these types of contacts, the owner must specifically review and validate costs, track progress and reconcile mark-ups and allowances. By necessity, this will require engagement with more internal and external resources to prevent unexpected cost overruns.

15_CHE_010117_EP_SAS_p52-55.indd

New tools and strategies

While technology is transforming (and has in some cases completely transformed) industries from retail and media to auto manufacturing, the CPI-related construction industry is in many ways still very similar to the way it was 20 years ago. Operating companies that are successfully able to rethink the entire project-management lifecycle and better understand how data are utilized on a project can achieve competitive advantage by improving the integrity of design, increasing the efficiency of construction processes and reducing operational lifecycle costs for the assets they build and operate.

Optimizing the use of staff and resources. Determining the level and type of owner or contractor resources required at each phase of a traditional major project is typically based on project manager estimates, project staffing projections or availability of project personnel. This is not only inefficient, but it often fails to leverage valuable resource and project staffing data from current and historical projects. This often occurs because current and historical data may not be readily available, or because the effort may require extensive data normalization, and there may not be internal personnel with data-analytic capabilities who can help develop staffing models and projections based on regression and other types of data analyses.

However, if structured properly and integrated into the project-resource-planning process, such data can help organizations to better plan, manage and forecast resources to align with project and organizational goals and targets. For instance, CPI project owners are often able to help make more-informed decisions regarding staffing levels and estimated project- resource costs when they are able to better use relevant data, implement standardized project-resource coding, and develop a consistent project taxonomy so that project attributes can be tracked and reported more effectively.

Ideally, if all projects within an organization were to utilize a common taxonomy of project attributes, and if all project team members were coded by function and time were tracked by project phase and activity, the following project metrics could be evaluated, benchmarked and utilized for real-time project estimating, forecasting and decision making:

  • Workload capacity
  • $/Full time employee (FTE); for example: $5 million/FTE/yr)
  • FTEs/project by project type per $100 million
  • Staffing ratios
  • Vendor breakdown by category (for example, % architect/engineer, % contractor, % subcontractor), project-delivery method, region and project type
  • Peak head count versus average head count by phase (for instance, by project-delivery method, by region or by project type)
  • Functional staffing ratios (for instance, by % engineering, % project management, % administration, % project controls)
  • Workload breakdown
  • Percent of project hours by phase (for instance, by % planning, % design, % construction, % commission and closeout)
  • Average hours by project activity (for instance, by project delivery method, by region, by project type)

Such detailed insight can then be utilized to rationalize staffing requests and project estimates. Additionally, companies can evaluate project-staffing curves with the ultimate goal of decreasing average project duration, improving estimating accuracy and reducing average FTEs on a project to free up resources and increase overall output.

Improving project reporting, documentation and overall project efficiency. Implementing a project- management information system (PMIS) on a major CPI construction project can contribute significantly to its overall success. The PMIS allows project teams to make effective decisions and accurately report project status to stakeholders by maintaining constant, realtime access to project information and key performance indicators. It also addresses document- and records-management needs that result from environmental regulations and building codes. The increasing volume of construction data, the need for immediate access to it, and the challenges of maintaining confidentiality and security make the PMIS for construction a standard practice on large, capital-intensive CPI projects.

By converting to a digital standard for project documentation, project teams can automate document distribution, management and retention, process reviews and approvals. A key consideration for implementing this new standard would be to ensure that all project vendors and consultants are supportive of the preferred PMIS and will fully leveraging it with their work streams.

Using cloud and mobile technology to improve the way data are captured and utilized on a project to improve performance.Project teams throughout the CPI are also beginning to leverage cloud and mobile technologies to capture and share data in realtime and quickly analyze, assess and report on projects. Cloud and mobile technologies are becoming more cost-effective and permit even remote project sites to connect with teams at corporate headquarters. For example, the use of computer tablets to capture and record field inspections, site walks, progress and permit status can provide realtime tracking and scheduling monitoring for all stakeholders, regardless of their location. If this technology is coupled with building information modeling (BIM) and regularly maintained progress photos, then stakeholders can get a true sense of construction activity and troubleshoot problems or questions as they arise without necessarily being physically present onsite.

CPI companies that have implemented cloud-based PMISs with mobile capabilities have experienced many benefits, including:

  • Better integration of cost and schedule reporting
  • Improved change-order management
  • Reduced cycle times
  • Secured and centralized management of project information
  • Automation of information requests, submittals and the solicitation processes

Reducing project risk and operating costs with data analytics. Reviewing a baseline schedule (which can easily involve 40,000 activities) for a CPI plant-construction project in a matter of hours is impossible without the help of automated data-analytic tools. Schedule-related tools have enabled project teams to quickly assess the overall quality of schedules submitted by contractors and subcontractors. This not only simplifies the project team’s understanding of large, mega-scale project schedules, but it also helps to reduce overall project risk. For instance, with the help of available data-analytic tools, schedule discrepancies can be addressed early in the project lifecycle, before larger, more costly issues arise.

The use of data-analytic tools can also help project owners to manage and mitigate complex construction claims. Identifying claims-related costs at the end of a project can be a monumental effort riddled with assumptions and exclusions if impacts are not monitored from the outset of a potential claim. CPI operating companies with extensive claims experience understand the value of continuous cost tracking and monitoring of project schedules to manage associated claim impacts with improved analytics.

Gaining competitive advantage by implementing a project-data strategy to take advantage of current and historical project data. The project team should consider the following to make the best use of cross-project data:

  • How data will be captured and used 
  • Whether an integrated PMIS will be utilized to track, manage, report, share and archive project documents and records
  • Whether there will be a common data taxonomy, project coding and work-breakdown structure leveraged across the entire project
  • How to leverage past data to build a predictive model that proactively alerts you when performance is likely to be impacted
  • How technology requirements and model results will be shared and used by contractors and subcontractors
  • How remote users will access project documents, and what level of security protocols will be employed

Although operating companies have historically been reluctant to take full advantage of technological advances, it is clear that many of these industries are poised for transformation. Leveraging historical and current project data while making better use of cloud and mobile technology can help to unlock the potential of project-management information systems for other business uses, as well. For instance, improved data analytics will help to improve project-management processes, allowing for better program-wide decisions to be made, providing improved visibility into project- and portfolio-level impacts, and improving capital project and portfolio performance.

CPI companies that are planning to embark on a facility construction project often face hurdles that can prevent successful project execution. However, many of today’s leading companies are mitigating this with innovative approaches to project delivery, and by leveraging technology. This is helping them to adapt to market demands while improving project visibility and control.

Specifically, CPI operating companies that have embraced the changing landscape of project delivery have benefited significantly through improved project performance, increased cost predictability and an improved ability to identify and mitigate risks before they are able to have a significant impact on the project. Selecting the most appropriate delivery structure and project-system infrastructure can help to set any capital-intensive project on a track for success, and help to ensure that the firm is appropriately equipped to deliver the project to completion.

Although establishing a hybrid delivery model and PMIS system requires a higher upfront investment cost compared to the status quo, these investments are very likely to produce a return on investment that will greatly exceed the initial investment. With an adequately structured and equipped project-delivery model, numerous risks will be avoided and efficiencies gained. n

 

Clay Gilge

Clay Gilge

Clay Gilge a principal in KPMG’s Major Projects Advisory practice (1918 Eighth Ave., Suite 2900, Seattle, WA 98101; Email: cgilge@kpmg.com). He has spent his career in the construction industry, starting as a trade contractor, then as a project engineer for Bechtel on energy projects, a senior construction contract manager for Intel, and now as an advisor with KPMG. Having worked in each of these roles, Gilge has observed firsthand the unique challenges and opportunities that exist to improve performance of capital-intensive projects. Gilge is the chief architect behind KPMG’s global major projects methodology, as well as KPMG’s industry-leading Major Projects Advisor and Capital Project Data Engine. Over the past decade, he has focused on helping energy and natural resources companies transform how they approach the delivery of capital projects by developing leading tools and methodologies supported by industry-leading benchmarking.

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