Purpose

Change Management -the Sooner the Better

Tue, 4 Mar 2008 12:37:57 -0700

Common to almost all large industrial projects is the need to actively manage change to scope, schedule and cost. Also common to many is the failure to adequately do just that early enough in the project. Often an owner client will have a previously completed benchmark project which is intended to act as a basis for scope, schedule and cost of the new project. In the case where no benchmark project exists, defining a clear starting point is more challenging and requires deeper industry research, as well as alignment by all parties very early as to the required capacities and production capability required. Also, key is the determination of the affordability thresh-holds the end product provides.
When an owner client has a benchmark project previously built that is identified as the scope definition, change control should be much easier. Unfortunately, change control early in the project is generally not given the attention it deserves. One recent experience I have struggled through involved a Owner with a recently completed project. Scope (design) records as well as real schedule and detailed cost data was available. Even though the data was available the project team failed to align around the actual project data (design, quality, quantity, durations etc) as a starting point for change control. While management cost expectations were clearly centered around their previous experience, the scope and cost of the new project quickly escalated and morphed without specific change control in place. To make a long story short, rapidly changing scope (not understood by senior management) and significantly increased cost brought the project to a halt while the team sought to re-align with management. This hiatus in the project schedule resulted in even more cost increases to the cost of materials and labor for the project. What change in behavior would have helped the team avoid this issue and millions in increased costs? The project team and senior management should have aligned around the benchmark scope schedule and budget as the baseline. Any and all changes to the baseline should have been subject to a formal review and approval process that provided visibility and justification for changes to all levels of management and allowed senior management to track the effect of those changes against project affordability metrics. Such a change management process implemented prior to site master planning and early programming and
design will help to assure the project team and senior management stay aligned and will help the owner avoid significant hic-ups in the developed of their new production facility.

The Preliminary Market Analysis

Wed, 27 Feb 2008 10:34:28 -0700

An owner who desires to build a facility in a location or country that is unfamiliar to them is best served by performing a thorough market analysis prior to setting expectations and success criteria for the given project. This process is oftentimes ignored or short cuts taken for a myriad of reasons.
The owner may wish to keep their intentions secret while they negotiate with government officials for development incentives. A thorough Market Analysis should be performed very early in the feasibility process. Generally, there is little funding available to finance such work and the need for detail and real time information is discarded for convenient sources of data.
In a recent case, an owner wishing to construct a project in a country unfamiliar to them established expectations of the amount it would cost them to build a project in the chosen country relying on an analyst who received anecdotal information and a regional modifier ratio from an estimator by phone. Unfortunately, the analyst did not use the data correctly and built expectations of a very low cost facility in the new country. Members of the company’s project controls team were forbidden to enter the country or make any inquiries as to cost , productivity, availability or other market conditions. By the time project controls personnel were allowed to enter the market, cost and schedule expectations had already been set based on anecdotal information and the die was cast.
The project controls team engaged in the study and analysis of the market on the ground as soon as possible, (after programming was complete) . The result of the analysis showed that expected cost and schedule would be difficult if not impossible to achieve. This went against the expectation set already established and threw the project into analysis paralysis and ultimately delayed the project by over a year and added tens of millions to its cost.
Performance of a detailed market analysis during early feasibility could have helped to avoid this very costly misstep.
The market analysis would include:
Gaining on the ground detail regarding the availability and productivity of the workforce as well as their cost per work unit as applied to each discipline.
Gaining specific cost, quality and availability data on materials at that geographical location and their cost.
Gaining specific on the ground data on the construction backlog and availability of quality contractors as well as Competing Projects.
Setting benchmarks for schedule expectations as experienced in that geography.
Development of local unit rates, perhaps estimation of a surrogate, fully designed project with fully developed quantities, unit descriptions, notes on pricing, specifications etc.
Determining sourcing options for permanent plant and equipment and country specific costs of importing where necessary.
Determination of historical inflation rates and current trends
Determination of materials pricing escalation and trending in this specific geography.

Such an analysis requires significant time on location and funding to engage local support early in the projects development.
As an investment, the cost of this analysis (perhaps $250,000) is insignificant when compared to the cost of a project hiatus (millions) such as the one discussed in the case study above.

Project Team Alignment Introduction

Thu, 3 Jan 2008 18:36:43 -0700

Often times establishing alignment within a project team is a delicate and difficult balancing act.
Particularly when you consider the number, type and individual motivations of the various parties.
Alignment is required at multiple levels: Contractual Alignment, Organizational alignment, Success criteria alignment, Functional alignment.
The purpose of this brief is to increase awareness of the many aspects of project alignment and the importance of doing it right. No where is alignment more important or more difficult that in multi-national, cross cultural settings.
Contractual alignment between Owner, Construction Management Firm and Contractors is pivotal to the success of any project. Contract type, method of sourcing, owner needs and expectations and contractor needs and expectations and allocation of risk to appropriate parties all contribute to the degree of alignment between parties.
In one case, an owner made the decision to select a firm to provide engineering, procurement and construction management services on a single source basis without engaging in competitive processes. The owner engaged the firm without fully negotiating the terms of the agreement with the assumption that the contract would be on a cost reimbursable basis. The chosen firm began engineering work without specific performance or delivery targets being discussed and agreed to between the Owner and the EPCM. In short, the result was the engineering portion of the work began to slip in terms of both cost and schedule. The EPCM began to add more and more personnel onto the project’s man-loader in order to mitigate the situation with little or no effect. The schedule slippage began to impact the procurement process for the project. The contractor expressed many times that they did not accept responsibility for schedule and cost slippage and that they were simply a service provider. In fact, billing and payment was predicated upon the submission of an invoice. There was no connection to progress milestones. As a result not a single success criteria was achieved on this project.
Lessons learned were many but a short list includes:
The Owner needed to clearly understand and communicate its success criteria.
The contracting method and type should have been designed to support and require buy-in to the project success criteria by the EPCM firm prior to engaging them in work.
The contracting process should have included at least an intensive competitive proposal process where clear plans and commitments by the candidate EPCM firms were presented, discussed and evaluated.
If a cost based contract was required due to the fast track nature of the project, specific performance targets should have been defined up front as part of the contracting process. Payment should have been directly connected to verifiable progress.
Payment terms, performance incentive programs etc should have been designed to create a common focus for both owner and contractor teams that insured that owner wins carried with them corresponding contractor wins.

Examining the Elements of Construction cost

Wed, 26 Dec 2007 16:48:27 -0700

There are many ways to look at the slicing and dicing of costs on a construction project.
This article looks at these costs simplistically. Project costs are made up of owner project costs and direct project costs.

Owners projects costs include owner project team costs, permitting costs, land purchase costs, feasibility studies, early scope definition costs, power and utility hook-up fees to name a few.

Direct Project Costs include Design Costs, Construction Management Costs, Site infrastructure costs, construction labor, Construction Materials and facility equipment, and construction equipment.

Regardless of contracting or delivery method, construction labor, materials and equipment are generally consistent as lowest common denominators.

Labor can be further broken down into labor cost rate, labor hours per unit of work. The cost rate can be thought of in terms of cost per hour.. Cost per hour includes direct cost of labor, taxes and insurance, fringe benefits if any, small tools, and other possible adders. The labor hour can be broken down into the labor hour and the amount of work that can be accomplished with that hour.

Material costs include a cost rate per unit of material and a calculation of units of material required. Such factors as wastage, freight, duties, expediting are added to the bare cost per unit or the calculation of units required.

Construction equipment rental costs are again a factor of time and rate. Rental rates charged to a construction project are generally based on hourly, daily, weekly or monthly rates. Monthly rates are commonly discounted 40-60% off of daily rates.

Effective management of construction costs calls for a thorough understanding of how costs are built up on your project. The devil is in the details and power to manage and influence costs are as well.

Setting Project Controls Expectations in the Project Team and its Stake holders

Wed, 26 Dec 2007 09:47:09 -0700

Setting expectations is a well used phrase in performance management and optimization.
Expectations are important to set the stage for what one wants to get from a particular effort or efforts. In the context of project controls, expectations play an important role. Often project team members have implicit expectations of the project controls team members that are not fully vetted up front. Project Controls provide a systematic way for the team as a whole to address the dynamic variables that occur on every project. They do not provide absolute assurance that all will go without a hitch. They provide a methodology to manage the impact of variables as they occur. Every project team member should understand their role in effectively exercising project control mechanisms.

Expectations or success criteria become the starting point for designing a project controls program for a particular project. A well defined set of success criteria are of paramount importance to the project controls team. It is important to recognize that success criteria need to be balanced. They need to reflect Owner/ Stakeholder needs without creating inappropriate levels of tension in the project team system.
Repeatedly during my 28 year career , I have witnessed over-reaching success criteria encourage or even force poor decisions that result in higher costs, broken relationships, longer durations, contractor claims and many other undesirable results. A common scenario is the establishment of a milestone for full funding of a project whose date is premature and does not allow for the systematic and careful development of project scope, schedule and cost baselines. The premature date encourages the development of baselines prior to solid data being available, compression of time and resources to develop those baselines and use of assumptions that may prove to be inappropriate.

The best results come when a clear and balanced set of achievable success criteria are developed by the project team and its stake holders early in the planning stage. These criteria need to be good enough to build on throughout the project life-cycle as they will constantly influence decisions that effect cost, schedule and quality.