Capital Projects as Temporary Organizations

The capital project as a temporary organization to create value

The conceptualization of projects as temporary organizations has been developed and explored by researchers in a variety of project management studies (Lundin and S?derholm, 1995; Midler, 1995; Packendorff, 1995; DeFillipi, 1998; Turner and Müller, 2003; Modig, 2007; Simard, 2014). This article aims to extend this concept to the case of “capital asset development projects”, or “capital projects”.

Evolution of the conceptualization of a project

Since the middle of the 20th century, the conceptualization of a project was associated to “an organizational unit dedicated to the attainment of a goal — generally the successful completion of a developmental product on time, within budget, and in conformance with predetermined performance specifications” (Gaddis, 1957). This led to a valid proposition in which it can be stated that the “organizational unit” exists while the project exists.

In the 80’s, a dictionary of terms in the field of project management has proposed to define a project as “a combination of human and non-human resources pulled together into a temporary organization to achieve a specific purpose” (Cleland and Kerzner, 1985).

In the 90’s, this “specific purpose”, the project objective intent, as proposed by Cleland and Kerzner (1985), was then associated to a change, put as a needed (or desired) transition as follows: “when transition becomes necessary within a permanent organization, temporary organizations are often created to deal with it” (Lundin and S?derholm, 1995).

Today, the concept of a project as a temporary organization is broadly accepted and is still being explored and developed by researchers. This concept puts the project temporary organization, and its team, as an agency performing “on behalf of” and “laid within” its parent organization (Turner and Müller, 2003) to perform the needed (or desired) transition for a change (Lundin and S?derholm, 1995) and, finally, to generate benefits as end results (Bradley, 2010). In this way project management has evolved from product creation to value creation (Winter et al., 2006).

Oil and gas capital asset development projects

In the case of oil and gas capital asset development projects, as investment projects, the core value to be created is the return on investment, which is the core benefit needed (or desired) by the permanent organization. The oil and gas parent organization (the sponsor party), embeds, and governs both the project temporary organization, in charge of the project outputs (products), and the project owner structure, accounting for the project outcomes (changes).

An effective governance (in the realm) of projects is the one that ensures that benefits are constantly reviewed and aligned with organizational strategic objectives (Hjelmbrekke et al., 2014), what suggests that benefit management practices is a key part of the governance framework. Additionally, the governance framework may provide the much-needed senior management support to champion the benefits-oriented view of projects (Paivarinta et al., 2007), as opposed to the limitations and harmful short-termism of an excessive emphasis on project management success, i.e., the project capacity in delivering the project products (outputs) in attainment on schedule, within budget and complying with customer required quality and pre- defined scope (time, cost, and scope).

The approach of measuring project success only based on cost, time and scope dimensions is known as the iron triangle approach. This approach is limited once there are projects that, even delivering the outputs on schedule, within budget, and accordingly to the baseline scope dimensions, were considered unsuccessful ones by owners (or customers), sponsors, and other stakeholders.

A qualitative study has confirmed that “even though we have gotten better at meeting the iron triangle of cost, time, and scope, many projects still do not achieve the strategic benefits – especially those that are nonmonetary – desired in most contemporary projects” (Meredith and Zwikael, 2019). “No one is specifically accountable for delivering these benefits” and “a more acceptable and effective approach is to assign the `project owner` as the accountable for managing the business case throughout the project lifecycle”. Thus, an adequate approach to assess success of capital projects is to go further, reaching the ownership success in achieving the outcomes, and reaching the investment success as the end- benefits needed (or desired) by the sponsor party. The capital project, as an investment project, will be considered successful if both the performance of the project temporary organization (project management success) and of the owner organization (project ownership success) are achieved accordingly to the sponsor expectations.

In this context, the performance of the project organization and the owner organization are both dependent on its own team capabilities and are under the influence of the overall governing rules and practices of the parent firm, what makes Agency Theory an adequate lens to observe the phenomenon.

Agency theory as lens to observe capital project temporary organizations

Agency Theory (Jensen and Meckling, 1976) discusses the agent-principal relationship, and has influenced the project management knowledge domain (Turner and Müller, 2003). The theory explains the firm as a set of contracts, discussing the information perspective of governance (Müller, 2011). Jensen and Meckling “define agency relationship as a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision-making authority to the agent” (Jensen & Meckling, 1976).

Agency Theory characterizes the organization of a firm as a set of contracts, written or unwritten, among principals (sponsors) and agents (managers and owners), where each part aims to maximize their own utility. The purpose of maximizing each own utility is the root-cause of the principal-agent issue, which comes from the potential divergent interests making the principal to monitor the actions of the agent and to avoid being arbitrated by incomplete and/or inaccurate information.

The management context within firms

In the management context, Agency Theory states that managers within the firm, as agents, will not act to maximize the returns to shareholders, as principals, unless an effective corporate governance structure is implemented to safeguard the interests of shareholders. This agent-principal relationship demands the parent organization to put in place both “monitoring and controlling” and “incentive and rewarding” mechanisms aiming to maximize the performance of the project temporary organization in the fulfillment of needed (or desired) objectives that have justified the project to be implemented, delivering the benefits of the changes and achieving project success (Turner and Müller, 2003; Jensen and Meckling, 1976; Ross, 1973).

The principal party is the one responsible for putting in place a governance framework that, in observing reasonable limits, constrains and drives the acts of the agent parties, assuring alignment and, by effect, safeguarding the interests of the principal, which in the case of capital projects, is to maximize the project investment return as the end-benefit.

In oil and gas capital projects the sponsor permanent firm is the principal party that empowers and legitimate both agents, the project manager (within the temporary organization), and the project owner (part of the permanent organization).

Capital asset development projects conceptualization

The start figure of this article illustrates the proposed conceptualization for the phenomenon of capital asset development project management and implementation.

This conceptualization puts the governance implemented by the parent firm (principal party sponsoring the project) as an important framework to avoid the potential extremes of behavior and/or expression of both agents, manager and owner. The governance is put in place to monitor and control and to incentive and reward the acts of the agents. This suggests that the governance framework assumes a mediation role in the relationship between the project team capabilities and the project success, driving the performance of both agent parties involved in developing and implementing the capital project.

The sponsor party is the parent organization that, acting as the principal, establishes and supports the temporary organization, and empowers the two agent parties:

• the project manager (within the temporary organization), and
• the project owner (part of the permanent organization).

It is important to recognize that the herein proposed conceptualization encompasses:

• The 3 (three) project primary roles, as per the Project Manager; the Project Owner, and the Project Sponsor; and
• The 2 (two) major project entities, as per the Project Temporary Organization (the performing temporary entity) and the Permanent Organization (with the owner and sponsor parent permanent entity).

Final remarks

Adopting Agency Theory as lens it is viable to consider the capital project as a temporary organization. This temporary organization (the performing entity) is embedded and sponsored by the permanent organization (the funding entity). By considering this:

• The project manager and its temporary team integrate the project management agent party, responsible for delivering the outputs (the assets produced by the project) to the project owner party. They constitute the performing entity, the temporary organization in charge of developing and delivering the project outputs.
• The owner and its permanent infrastructure integrate the project owner agent party, responsible for receiving the outputs and, by using the outputs, for realizing the outcomes that, by effect, will generate the benefits for the sponsor party. They constitute the agent party accounting to the sponsor principal party within the permanent organization.
• The parent organization and its permanent infrastructure integrate the sponsor principal party, responsible for sponsoring the project, for legitimating and empowering both agents’ structures, and for putting in place a governance framework to constrain and drive the acts of both agents, monitoring and controlling them to assure the parent organization best interests.

This conceptualization is in line with other studies in the literature which identifies the 3 (three) primary roles and the 2 (two) major project entities involved in the project management and implementation (Turner and Müller, 2003; Zwikael and Smyrk, 2012; Badewi, 2016; ul Musawir et al., 2017; Zwikael, 2018; Zwikael, 2019; ul Musawir et al., 2020).

“Agency Theory” and the “Project Temporary Organization Concept”, as separately well-stablished and consolidated theory and concept, when integrated, play a prominent role to explain the relationship dynamics in the realm of capital asset development projects.

The herein proposed conceptualization reflects what is adopted in practice by major oil and gas firms. When a capital project (to develop a new asset, or to transform an existent one) is needed (or desired), the firm sets a project temporary organization to be the entity in charge of the capital project.

Finally, developments on this conceptualization should incorporate increments by adopting other theories as lens, as per stakeholders’ theory, resource-based theory, and other related theories and inherent concepts and definitions.