WHY DO SO MANY INDUSTIRIAL / ENERGY / PETRO-CHEM CONSTRUCTION- EPC CAPEX PROJECTS EXPERIENCE COST OVERRUNS:

THE LEADING REASONS WHY NUMEROUS INDUSTIRIAL / ENERGY / PETRO-CHEMICAL & PROCESS RELATED CONSTRUCTION- EPC CAPITAL PROJECTS SUFFER COST OVERRUNS & SCHEDULE DELAYS:

The question repeatedly asked in the Industrial / Energy / Petro-Chemical & Process Industry is why do so many mid-sized & large multi-million dollar Industrial / Process related CAPEX construction projects?experience major cost overruns & schedule delays??

Just about every day we read about Industrial / Process related Construction / CAPEX projects overrunning their budgets by 25%, 50% or more, costing the Industrial / Energy Petro-Chemical / Process industry millions of dollars each year, wasting costly engineering / construction labor and field in-direct / support resources. So how can this ongoing cost overrun problem be rectified?

Cost issues, schedules, project risks & potential or actual change orders many times receive minimal management validation & oversight. Project Management many times do not act immediately on cost & schedule issues that eventually become cost & schedule challenges & setbacks.

Research and feedback on this subject would suggest that as many as 6 out of 10 (more than 60%) of major Industrial / Energy Petro-Chemical & Process related CAPEX / Construction Projects fail to meet their planned cost & schedule goals!??

So why?do cost overruns & schedule delays happen??

In this article, I will detail out the main causes for this problem & list out possible ways these cost & schedule overruns & delays can be rectified.

The focus of this article is on Industrial / Process CAPEX / EPC related projects valued up to one billion-dollar or more . However, it also is pertinent to other Industrial & Manufacturing type projects.

For the last 40 years, I have been a Senior Project / Construction Manager & Chief Estimator with both Oil / Industrial / Energy Petro-Chemical Production Companies & EPC Contractors involved with 100’s of mid-sized & large EPC related Process, Industrial / Offshore / Energy Petro-Chemical, Oil & Gas & Industrial Projects in the USA & around the world. I have been involved with many successes, however, I have seen a fair number of failures on these types of Industrial / Process EPC projects.

I frequently get asked my opinion on this topic of cost overruns & schedule delays. The following are my observations & comments on this important subject.

Numerous Industrial / Process / CAPEX type construction projects get into trouble, because of the following:?

?SCOPE OF WORK ISSUES

The Scope of Work statement (SOW) is a listing of all of the work that is to be completed to execute the Industrial / Process construction project.?Any?work items?that are missed or ambiguous / unclearly described?and?defined will many times have a negative impact on the final estimated cost.??Any scope creep / growth that takes place during the early stages of the Industrial / Process construction project must be priced out & included in the final cost estimate.?

ESTIMATING APPROACH & METHODS UTILIZED?

An incorrect or flawed cost estimate that is based on incorrect quantities, bulk material unit costs, labor rates, major equipment costs, construction equipment / in-directs, and labor productivity expectations can have a serious cost impact on the final Industrial / Process construction cost estimate. This issue can lead to an unreliable schedule & increase the risk of an estimate / cost overrun.?The cost estimated should be prepared or at least reviewed?and?validated by an experienced Cost Estimator / Process Engineer?who?is cognizant of the?SOW.?Not?everyone is skilled in estimating labor, materials, in-directs, future escalation, and?a host of other items that need to be part of the final cost estimate. It is important that an experienced?Estimator / Chemical Engineer or similar be involved with the estimating effort.??Failure to recognize & include increased material spikes & labor costs & shortages / extended delivery times of many key constriction materials including, copper cable, steel (structural steel, rebar, CS / SS pipe & fittings / valves) & other materials. Many times not enough time is allocated to reviewing / checking the final estimate?and?making sure the estimated cost values align with the?scope of work?descriptions.??Frequently,?the cost estimate is compiled with a mindset of arriving at the lowest cost solution. This approach can sometimes be detrimental to the final estimated cost.??A benchmark evaluation comparing the current estimate with historical values could be beneficial in conditioning the final estimated cost.??The Industrial / Process estimate should describe in detail?the engineering deliverables / drawings c/w drawing?numbers, revisions, sketches,?SOW?documents, inclusions, assumptions, exclusions, and?estimating assumptions, currency exchange rates, US?and?International inflation rates that were utilized & import duties/taxes that the estimate is based on.?

?EARLY ESTIMATES / FEED STUDIES / CONCEPTUAL ESTIMATES?

Conceptual & early Industrial / Process estimates many times have an optimistic bias built into them;?the estimate is many times based on a?best-case?outcome that has in some cases overlooks some of the technical & logistical risks & challenges associated with the project.?Early Industrial / Energy Petro-Chemical & Process Cost Studies, Conceptual Designs & FEED studies many times are completed by individuals or teams that have a vested interest in the future project moving forward. This bias / predisposition can negatively impact the final estimated cost.??

?OPTIMISTIC ESCALATION / INFLATION / CURRENCY EXCHANGE RATE ESTIMATES

A high percentage of early / front end cost estimates tend to be over-optimistic, this regrettably can lead to an underfunded Industrial / Process cost estimate. A risk mitigation program / session can be beneficial to alleviate this problem.?Often, the Industrial / Process estimate is compiled utilizing the most optimistic escalation forecast rates.?Major Industrial / Process projects that are in the field for 2, 3 or 4 years are particularly susceptible to increased costs related to labor, process equipment, bulk & engineered materials & field in-directs.?

?ABSENCE OF EPC IMPLEMENTATION STRATEGY?

Failure to produce an Engineering, Procurement & Construction key major milestone schedule, complete with start & finish dates. The cost?estimate?need?to reflect the planned EPC approach. The absence of a detailed Engineering, Procurement Construction (EPC) & handover implementation strategy / path forward plan many times can result in a cost overrun.?Is the project going to be stick built or modularized? Is the labor cost based on Union or Open Shop labor? Is direct hire or a sub-contractor approach to be utilized? Can the field in-directs be reduced if a high percentage of modularization is utilized & built offsite???If specialist sub-contractors to be used, make a list?of?qualified sub-contractors?and?review their qualifications?and?experience. Selecting?and?removing?a?non-performing?sub-contractor?from?the?site?can lead to significant cost overruns?and?delays.

?SCOPE CHANGES / LATE DESIGN CHANGES?

Scope modification?and?design changes can significantly impact early received quotes related to major equipment & engineered materials (i.e. tagged items); Engineering / sizing changes to major equipment that increases the cost of major equipment items?and?increases the flow rates, pumps, and?piping sizes can be a serious issue.?Late engineering/design, procurement, and?scope modifications many times give rise to in additional manpower requirements, inflated construction re-work, out of sequence activities & additional field in-directs.?Make every effort to minimize this issue.

INADEQUATE EARLY / FRONT END PROJECT PLANNING (FEP)?

Front End Planning?(FEP) is the key to success?in?any major Industrial / Process project.?FEP?can mitigate possible future cost & schedule failures.??When the project?scope of work is defined?and?agreed, the next step is to?develop?various work packages?and?decide if the work is to be performed on a direct hire basis or are specialist sub-contractors to be used.?

?LACK OF EARLY & ONGOING RISK MANAGEMENT PROCEDURES?

Project risk items not systematically evaluated, priced out and included in the Industrial / Process estimate will many times result in a project cost overrun.?The estimating / tender team?and?individual’s familiar with “Risk Management” are required to list out all possible risk-related events?and?situations that could go amiss on the future Industrial / Process project.?When the risks have been identified, the risks can be evaluated, priced out and included within the Industrial / Energy Petro-Chemical & Process estimate if deemed appropriate by senior management.

?OVER-OPTIMISTIC PROJECT EXECUTION SCHEDULES?

Unrealistic, inconsistent?& an over-optimistic EPC execution schedule based on manpower computations from a flawed cost estimate?is another factor that could many times lead to a Industrial / Process project cost overruns.?An EPC project schedule that fails to consider end date slippages related to major equipment delivery, accidents, re-work, major change orders, possible extreme weather, such as snow, cold temperatures, rain or extreme heat. These situations & conditions will impact field productivity & delay handover of?the Industrial / Process?project to the operations group.?Inadequate planning for scope modifications / change orders & possible claims that will impact both the cost & schedule. Change orders are a major reason cost overruns & schedule delays on Industrial / Energy Petro-Chemical & Process projects.

INEXPERIENCED PROJECT & CONSTRUCTION MANAGEMENT?LEADERSHIP

A large number of major Industrial / Process projects & their budgets, estimates & schedules get into difficulties because?of?inexperienced / unproven / untested Project & Construction Managers are managing the EPC effort.?Untested leadership of a Industrial / Process project can many times result in cost overruns & schedule delays. To successfully execute one of these?multimillion-dollar?major complex Industrial / Process projects,?the Project & Construction Managers should have a minimum of 10 years direct home office & field experience in managing, estimating, procuring, scheduling & controlling these complex types of projects.??Owners / operators many times make the serious mistake of choosing “MBA / Financial” type individuals, with little or no knowledge of the complex EPC activities to look after their interests.??The troubling fact is that unfortunately these individual do not ?have the know-how or experience to recognize potential cost overruns, schedule delays, productivity trends, and a host of other issues that add costs to the project and cause delays that lead to extending the field in-directs & project handover.?If Owners / Operating companies don’t have the insight to utilize experienced Project & Construction Managers, then cost overruns & schedule delays on major Industrial / Energy Petro-Chemical & Process industrial projects will persist.?

?ABSENCE OF PROJECT ORGANIZATION / UNCLEAR ROLES, RESPONSIBILITIES?& REPORTING PROCEDURES

Unfortunately a lot of?major CAPEX multifaceted Industrial / Process industrial projects lack organization charts?and?reporting lines.?Project & Construction Management /?Engineering / Procurement / Project?Control job descriptions, roles & responsibilities are vague or don’t exist, manpower loaded spreadsheets indicating start & finish dates that the Project / Construction team will be mobilized & de-mobilized from the project are many times not developed.?Failure to produce these important project control documents can lead to individuals being on the project longer than required, resulting in potential cost overrun.? Another issue many times encountered is that new Engineering / Construction Management employees are not given initial on boarding information on project goals, issues & procedures that leads to these individuals spinning their wheels for the first 2 or 4 weeks of their assignment. Not appointing the most experienced & motivated leadership team. Endeavor to employ the “A” Team Project Management Squad to execute the project. Cost overruns could occur if the team executing the work is not up to the task at hand, care should be taken to choose the correct blend of experience & enthusiasm.

FAILURE & LACK OF COST CONTROL?

The cost control effort many times performs an “accounting” effort, compiled after the work has been completed. Lack of project control / cost control tools and procedures, together with limited proactive follow up to schedule slippage, and low field productivity will many times set the stage for cost overruns on Industrial / Process type projects.? No genuine proactive cost engineering / project cost control will many times set the stage for a cost overrun.

?INADEQUATE CONTINGENCY / ESTIMATE ACCURACY?

Unrealistic and inadequate contingency / management reserve funds contained in the final approved project estimate is another contributing factor to cost overruns. Many Owners complain if they see 5% or 10% added to the cost estimates bottom line. However,?in reality,?with only 20% or 30% of the detailed design completed the contingency should be 15% or 20% or possibly more to protect the estimates bottom line.?A detailed Contingency review should be completed at the completion of the estimate, utilizing either available Risk / Monte Carlo / Range Estimating tools or a meeting of the Project Team to assign monetary values to the potential risks associated with the Industrial / Energy Petro-Chemical & Process project.

?INEFFECTIVE CONSTRUCTION MANAGEMENT?

Inadequate distribution / allocation of material, field labor & construction equipment / rental equipment resources. The assumption on this issue is the Owner is directly hiring a Construction Management firm to manage the construction effort. This could include procuring between 10 to 30 construction work packages.

?Issues to consider to minimize cost overruns are:?

• Over-manning:??Construction Managers are typically paid on a reimbursable or cost per hour for each individual, so the more individuals they have on site the more it costs. Many times if a Construction Manager is calling for 25 site?staff,?the reality is that the project may only require 17 site staff.??
• High fees & profit margins are another issue to be cognizant of.??
• The Construction Manager should provide a?manpower?loading?chart, indicating job description / individual’s role, together with start & finish date.??
• Failure to optimize laydown areas,?marshaling?areas, construction worker parking, changing rooms / toilets / lunch areas / failure to acknowledge additional COVID related costs to the construction effort.?
• Limited optimization of plant hire / construction equipment.?Construction equipment should be removed from?the?site when not being utilized or at least placed off-hire.??

All?of?these issues if not adequately executed can?lead to reduced work performance / productivity?and could?result in cost overruns.

?OVERCOMPLEX SPECIFICATIONS / EPC PROCEDURES?

EPC procedures & reporting systems such as RACI matrix type tools?and?the like?that are?not fully understood or correctly utilized by the EPC team, can lead to additional man-hour?and?budget overruns.?Many of these reporting systems do not add value to the project?and?can indirectly result in cost overruns.?

?POOR COMMUNICATIONS BETWEEN THE PROJECT TEAM?

Poor or limited communications between all of the EPC team members?is another issue that can lead to cost overruns. This?includes communicating?to the construction field force on the projects current status, current schedule, milestones to be met, current & future challenges, and?the crucial activities that need to be accomplished in the near term to meet both budget & schedule goals.?Transparent?and?clear-cut communications are vital,?or missteps will result?in?that lead to cost overruns.?

?LOW CONSTRUCTION PRODUCTIVITY?

Low construction productivity can?lead to significant cost overruns. Field productivity should be measured on a regular basis?and?steps should be made on an ongoing basis to maximize worker productivity.?Issues such as busing the workers to their work area, materials?and?construction equipment should be readily?accessible / nearby.?Toilets, change rooms & temporary warehouses should be available, it is important on a weekly basis to keep the field workforce appraised of the project’s status and the major milestone that need to be achieved.??Other issues?that can impact cost are high field labor turnover & poor field supervision.?

?ABSENCE OF COMMISSIONING / START UP PLAN?

The lack of?an initial commissioning plan / hand over sequence to?the?End User is a difficult scope to estimate at the early stages of a project.?Front end planning together with historical benchmarks & industry metrics can greatly assist in ensuring a cost overrun does not occur related to this important handover deliverable.?

?INADEQUATE – OVERCOMPLEX CONSTRUCTION CONTRACTS?

The quest for lowest bid can be the harbinger of cost overruns & schedule delays. Confrontational contracting methods?and?ill-defined construction contracts that lack a detailed list / schedule of rates for change orders?and?late payments to sub-contractors can lead to claims?and?cost overruns.?A detailed listing of unit prices (labor / materials & construction equipment) / day work rates & percentage mark-ups should be requested in the construction bidding / evaluation effort & prior to any contract award.

?PREMATURE FIELD MOBILIZATION?

Going to the field too?quickly with incomplete construction information / AFC drawings can lead to longer General Condition’s durations & potential cost overruns.?

The above are some of the main issues?that can lead to cost overruns & schedule delays on Industrial / Energy Petro-Chemical & Process Capital Projects.

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