Capital projects involve an intricate coordination of interdependent activities, resources, and stakeholders to fulfill three (3) primary project expectations: scope, cost, and schedule. When one of these three outputs changes, which inevitably occurs, the other two factors likely increase. This creates havoc to internal budgets, financial metrics, and internal support (a.k.a. – politics.)

Bad news: Projects fail more times than not. Industry surveys covering over 1000 major companies show an average project failure rate of 55% (range from 40 % to 70% failure). The top-noted failure criteria include: 1) finish on-time and in-budget, 2) Exceed budgets, 3) Blown schedules, and 4) Failure to meet requirements. Common reasons offered for these failures include: 1) insufficient up-front planning, 2) incomplete estimates, 3) ignoring requirements, 4) underestimating productivity, 5) poorly defined performance indicators.

Good news: Industry surveys of over 60 companies show that when Project Management Best Practices are applied, projects are highly successful, beat industry averages (Figure 1), and provide distinctive competitive advantages. Keys to this success includes: 1) careful and complete up-front planning, 2) strongly implemented organization and execution methodologies, 3) complete pre-project risk evaluation, 4) full knowledge of contract provisions, 5) relentless tracking of cost and schedule changes, and 6) transparent communication to all stakeholders, 7) immediate problem resolution.

Successful projects require constant and active participation by all stakeholders to avoid pitfalls and identify opportunities for success. Focusing on the goal of beating the average requires attentiveness to the above key success factors that will drive project success.

The recent disastrous event of the offshore drilling rig Deepwater Horizon, underscores the message that Environmental, Health & Safety (EH&S) business risks can originate from any operating or decision-making position in a company. Although no information is known about the confirmed cause of this incident at this writing, the incident itself presents relevant lessons learned to any company who has an operations section or is involved in any way with construction. No matter if the industry is heavy manufacturing or LEEDS home building, the company can face adverse consequences and damages to their bottom line and to their reputation. These impacts also extend beyond the company to other stakeholders who may be impacted directly and indirectly: neighbors, stock-holders, vendors, and industry peers each have a stake in the outcome. Any and all of these stakeholders may claim foul and initiate damage suits. The environmental consequences from Deepwater Horizon are likely to be far reaching and impacting to many industries and other stakeholders; claims are certain to follow.

Are your clients positioning themselves for their own disaster?

How are you helping them identify and mitigate potential risks before they become reality?

Business Risk Drivers often originate where accountability for results and implementation responsibility are separated. The more complex the operation - the more the organization requires sophisticated communication and tracking processes.

Arbitration used to be considered a cost efficient way of resolving a construction dispute in lieu of litigation. However, as clients can attest, this is not necessarily true. If arbitration is the selected method of dispute resolution, there are several cost reduction measures that can be implemented without jeopardizing the merits of your case. These include the following five measures:

1. Insisting on a continuous hearing schedule instead of breaking up the hearing in segments with week to month long breaks, which results in reeducation and remobilization costs.
2. If the trial needs to be scheduled in segments, cut the case into relevant pieces (large change orders versus small change orders, schedule delays versus workmanship issues, etc.)
3. Shorten the trial testimony by limiting the hearing time spent on discussing the project background history. Prior to the hearing or testimony, parties can file a witness background statement, timeline of events, and other non-disputed fact based information.
4. Present opposing topic experts (schedule delay experts, engineering design experts, etc.) at the same time so that arbitrators will better understand the issue and allow for more effective arbitrator questions.
5. Conduct the hearing as a paperless case.

Thank you to Allison Snyder at Porter & Hedges, LLP who compiled the complete list of cost reduction measures for arbitration.

………………………………….

I like this video because it illustrates the value of having a third party perspective. Project managers and attorneys are frequently focused on the “ball” during a project and/or during a project dispute. Third parties, such as experienced construction experts, look at the ball within the situation, such as the [deleted] in the clip. The value added includes the following:

1. Bringing in an expert into the project development team or early phase of a dispute to identify potential risks to project success and alternate strategies.
2. In addition to being an expert in the field, having the ability to see the big picture as well as the details so that action plans can be re-baselined if needed and the self-audit process to ensure the dual perspective is being met.
3. Bringing reality and stability to a situation by having an independent separate fact from emotion or perception, which promotes effective resolution of issue.

It is easier to appreciate the technological difficulties of hitting the reservoir payload when the article compared the successful drilling of the Chevron well named Tahiti to a dartboard, “That well needed to hit a 200-foot-long target from five miles away — akin to hitting a dart board from a city block away.”

These fields are located in the Gulf of Mexico but also off the coasts of Brazil and Ghana. Even more significant, experts speculate of a massive oil reservoir spanning across the Atlantic Ocean from Africa to South America, which could be good news for the rest of us. As the demand is projected to increase with the surge of second and third world population needs, the world will need additional fuel to maintain the energy supply. At least until alternative energy sources make a significant contribution to the supply volume and energy demand becomes more controlled.

In the meantime, while we wait for additional large oil findings, we applaud the efforts of companies investing in the advanced technology and taking the financial risks in these billion dollar capital projects.

The method of construction contracting and risk mitigation must change based on this new market reality. The concept of shifting construction risk to construction firms may seem a prudent risk management approach. This approach has been used for many years through the process of lump sum biding, requiring insurance bonds, and imposing liquidated damage contract clauses.

In this new market reality construction companies are less likely to except these approaches as they present an unacceptable risk to the construction company. As a business, construction companies simply are not capitalized to the level required to cover large monetary awards, nor do they have the ability to obtain large enough insurance or performance bonds to support the end users business risks.

It is also highly possible that the age of lump sum bidding will continue to decline to become the exception verses the norm. Mixtures of contracting methods will be used in the future. The lump sum contracting method will be used with well-defined project scopes of work or with specialized subcontractors. Less defined project scopes of work will lend themselves to cost-plus, time and material, unit pricing or alternatives such as earned value contracting may see broader acceptance. As the project scope becomes better defined it is possible to convert these contract strategies to lump sum.

Fostering an environment that facilitates a clear dialogue between the business owners and the construction companies will be the best strategy in this difficult market. Proper due diligence related to business strategies and establishing clear expectations as to the final outcome of a capital project will be critical. An inclusive rather than adversarial project development approach, where contractors are invited to provide input for the overall success of the capital project, will be the order of the day.