Driving Overall Project success in a Hot Labor Market

Driving Field Productivity
Southeastern Construction Owners & Associates
Roundtable (SCOAR) Meeting
Presented by: Lara Keefer, PhD
January 29, 2015
Confidentiality Statement
This document and the information contained herein are proprietary
and the property of Independent Project Analysis, Inc., which
expressly reserves all copyright and other ownership rights in its
contents. Information about the subject matter, content, and structure
of this document is confidential and proprietary. Neither this
document nor any information contained herein may be disclosed
without the prior written consent of IPA. This document is not to be
copied or distributed without authorization.
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INDEPENDENT PROJECT ANALYSIS
The Labor Market in the USGC Is Uncertain
• In early 2013, we observed a dramatic increase in
labor costs; all-in wages jumped from ~$60 to $70 in
just over 6 months
• Project announcements along the U.S. Gulf Coast
(USGC) in response to shale oil and gas sparked
much of the increase
• However, recent delays and cancelations have
lessened the effect
• The magnitude of a US hot market is unknown, yet we
need to be prepared
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INDEPENDENT PROJECT ANALYSIS
The Perfect Storm?
FACT: Recent trends around real prices show
steady increase in the cost of capital projects.
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INDEPENDENT PROJECT ANALYSIS
The Perfect Storm?
FACT: Recent trends around real prices show
steady increase in the cost of capital projects.
FACT: Engineering quality is declining (driven by
aging-out of engineering talent) which is driving
increased problems in project execution.
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INDEPENDENT PROJECT ANALYSIS
The US Is Losing Engineering Resources
Number of Engineers (millions)
1.75
1.65
1.55
1.45
1.35
1.25
2000
2002
2004
2006
2008
2010
2012
Year
Source: US Department of Labor Bureau of Labor Statistics
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INDEPENDENT PROJECT ANALYSIS
Engineering Quality Continues to Degrade
How Does This Relate to Field Labor?
• Experience is falling rapidly because of engineering
workforce demographics
• Lack of engineering experience is translating into
lower quality engineering design
‒ Owners have mostly been able to identify and correct
engineering quality problems before they show up in the field
‒ However, frequency of basic design errors in vessel sizing,
pipe stress calculations, and other core tasks is increasing
• Combination of declining owner and contractor
experience will eventually lead to projects failing in
execution or operation
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INDEPENDENT PROJECT ANALYSIS
The Perfect Storm?
FACT: Recent trends around real prices show
steady increase in the cost of capital projects.
FACT: Engineering quality is declining (driven by
aging-out of engineering talent) which is driving
increased problems in project execution.
FACT: We are heading into a period of increased
capital activity in the US where labor demand
may outstrip labor supply.
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INDEPENDENT PROJECT ANALYSIS
Announced Spending for Large Projects in the U.S.
80
Projects entering FEL 2
after 2014 have yet to
be announced
Yearly Capital Spend ($BB)
70
60
50
40
30
20
10
0
2000
2005
2010
IPA Database ($2013)
2015
As Announced
IPA
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INDEPENDENT PROJECT ANALYSIS
Severe Accidents Tripled in the Hot Market
For a large project
with 1 million safety
hours
Pre-hot market
projects experienced
less than one DART
Hot market projects
experienced just
over two DARTs
Prob > χ2 = 0.0002
DART = Days away from work, job restrictions, transfers, and fatalities
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INDEPENDENT PROJECT ANALYSIS
The Perfect Storm?
FACT: Recent trends around real prices show
steady increase in the cost of capital projects.
FACT: Engineering quality is declining (driven by
aging-out of engineering talent) which is driving
increased problems in project execution.
FACT: We are heading into a period of increased
capital activity in the US where labor demand may
outstrip labor supply.
CONVERGENCE: The implication is even higher
capital cost and significantly poorer safety.
We risk losing the license to operate.
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INDEPENDENT PROJECT ANALYSIS
Weathering the Storm
Labor Risk Mitigation
• Strategies to manage the stresses on the
construction labor market:
INCREASING
THE SUPPLY SIDE
DECREASING
THE DEMAND SIDE
Training Programs
Importing Labor
Paying Per Diems
etc.
.
.
Pre-fabricated equipment
Modular construction
Resource leveling
etc.
.
.
• All these strategies add cost to a project relative
to typical project environment
• But, given the project context, each decision is
based on a cost / benefit analysis
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INDEPENDENT PROJECT ANALYSIS
Productivity Improvement
as Labor Risk Mitigation Strategy
• Improving field labor productivity benefits both sides of
the cost / benefit equation
 Fewer hours per task, fewer hours per quantity
 Doing more with less
• Improved productivity is the least costly way to address
the labor supply chain weakness
• Improved productivity can be achieved through more
rigor in work processes
• This talk will focus on what IPA research shows are the
drivers of better field productivity
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INDEPENDENT PROJECT ANALYSIS
Agenda
Introduction
Who is IPA?
Labor Productivity in a Hot Market
Improving Labor Productivity
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INDEPENDENT PROJECT ANALYSIS
Who is Independent Project Analysis (IPA)?
• IPA studies capital projects as a field of empirical
research for over 25 years
• IPA employs a unique business model based on faceto-face meetings with the teams to assure data
quality
• IPA has a database containing project data on over
16,000 projects from process industries (oil and gas,
refining, pipelines, chemicals, consumer products,
pharmaceuticals, minerals, power, paper, etc.)
• IPA employs about 250 staff members world wide
• IPA is a global company with offices in the US, Brazil,
The Netherlands, UK, Singapore, Australia, and China
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INDEPENDENT PROJECT ANALYSIS
What IPA Does
• IPA evaluates about 800 major projects each year for companies
around the world with all data collected in person by IPA analysts
• We evaluate:
‒ The quality and completeness of the business case and commercial
arrangements
‒ The competitiveness of the project at the end of scope development
‒ The readiness of the project for sanction
‒ The execution practices employed during engineering and construction
‒ The relative success of the project after startup
• We develop a very complete technical, business, and people history
of each project from front-end through early operation
• These histories become the data that we use to find what works and
what doesn’t work in capital projects
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INDEPENDENT PROJECT ANALYSIS
IPA’s Approach:
Use the Data to Determine Best Practices
Project Inputs
Cost
Business Case/
Development
Strategies
Project
Management
Practices
Technological
Innovation
Front-End
Loading
Schedule
Parametric
Statistical
Techniques
Functional
Representation/
Integration
Operability
Safety
Project Practices That Demonstrate
Significant Relationship With
Outcome Performance Metrics
Reserves
Volatility
(E&P / Mining)
Controlling for: Project Characteristics, Scope, and Technology
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INDEPENDENT PROJECT ANALYSIS
Clients Represented in IPA’s Databases
Abbott Laboratories
Abitibi-Price
Access Midstream
ADNOC
Agip KCO
AGRA Simons
Agrium
Air Liquide
Air Products
AkzoNobel
Alcoa
Alyeska
Anadarko
Anglo American
AngloGold Ashanti
Antofagasta Minerals
Arkema
AstraZeneca
Athabasca Oil
Atlantic LNG
AVR
AWE
BAPCO
Barrick
BASF
Bashneft
Bayer
BC Hydro
BG Group
BHP Billiton
Bluescope Steel
Boise
Borealis
BP
Braskem
Bristol-Meyers Squibb
Cairn India
Caltex
Canpotex
Cargill
Chevron
Chevron Phillips Chemical
China Three Gorges Project
Development Corp.
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CITGO
CNOOC
CNRL
Codelco
Colonial Pipeline
ConAgra
Conoco Phillips
Constellium
Cosan Biomassa
CSR
Dana Petroleum
De Beers
Dominion
Dow
Dow Corning
DuPont
Eastman Chemical
Ecopetrol
Eli Lilly
Enbridge
EnCana
Eni Petroleum
Entergy
Eskom
Evonik Industries
ExxonMobil
Flint Hills
Florida Power & Light
FMC
Freeport LNG
Freeport-McMoran
GASCO (Abu Dhabi Gas)
Gazprom Neft
GDF Suez
Genentech
George Weston Foods
Georgia-Pacific
Gerdau
GlaxoSmithKline
GS Caltex
Hess
Hoffmann-La Roche
Honeywell
Husky Oil
Incitec-Pivot
INEOS
INPEX
International Paper
Invista
Irving Oil
Johnson & Johnson
Kellogg
Kimberly-Clark
Kinder Morgan
Kinross Gold
Koch Industries
Kraft
Kuwait Nat’l Petroleum
Lanxess
Laricina Energy
London City Airport
Lukoil
Lundin Norway
LyondellBasell
Maersk
Manabi
Marathon Oil
Marathon Petroleum
MeadWestvaco
Melbourne Airport
Merck
MillerCoors
Milliken Chemical
Mineração Serra Verde
Mineração Usiminas
Miro
Mosaic
Motiva
Mubadala
NaiKun Wind Energy
Nederlandse Gasunie
Newmont
Nexen
18
Noble Energy
Norsk Hydro
Nova Chemicals
Novartis
Novus
Numico
Nynas
Oando
Odebrecht Agroindustrial
OMV
Orica
Origin Energy
Pacific Energy Partners
PDVSA
PEMEX
Pertamina Hulu Energi
Petrobras
Petro-Canada
PetroChina Petroleum
Petroleum Development Oman
PETRONAS
Phillips 66
Pioneer Natural Resources
Praxair
Premier Oil
Procter & Gamble
PTT Group
Qatar Petroleum
Quadra FNX
Reliance E&P
Repsol
Rio Tinto
RockTenn
Roc Oil
Rohm and Haas
RWE
SABIC
Samarco
Sanofi Pasteur
Santos
Sasol
Saudi Aramco
Saudi Electric
Shell
Sibur
Singapore Economic
Development Board
Singapore Refining Co.
S-OIL
Solvay
Southern California Edison
Southern Company
Staatsolie Suriname
Star Petroleum Refining Co.
Statoil
Stepan
Suncor Energy
Sunoco
Syncrude
Talisman Energy
Tennessee Valley Authority
Tengizchevroil (TCO)
Tesoro
Texas LNG
Total
TPC Group
TransCanada
UK Government
US Department of Defense
US Department of Energy
US Department of State
US Gypsum (USG)
US Steel
Vale
Valero
Vetra Group
Votorantim Metais
Wacker
Westlake
Williams
Wintershall
Woodside
Xstrata
Yara
YPF
INDEPENDENT PROJECT ANALYSIS
Example of IPA Data on US Productivity
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INDEPENDENT PROJECT ANALYSIS
Example of IPA Data on USGC Productivity
Baton Rouge
Baytown
Beaumont
Borger
Channelview
Chocolate Bayou
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88
127
67
63
70
36
Convent
Deer Park
Freeport
Geismar
Houston
La Porte
41
170
127
99
132
98
Lake Charles
Norco
Orange
Pasadena
Plaquemine
Port Arthur
20
147
122
66
105
56
109
Sweeny
Texas City
Victoria
80
185
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INDEPENDENT PROJECT ANALYSIS
Productivity is Management-Driven
• We collect the wage make-up for all-in wages and
productivity on each project we analyze
• We compare these data and analyze variance
• What we have learned:
‒ Basic skills levels determine the raw material for productivity
‒ But management determines what you really get
‒ For projects in the same place at the same time with the same
labor pool, the variation around craft productivity is +/- 25
percent on a single standard error
• This means there is a lot to be made with better
management
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INDEPENDENT PROJECT ANALYSIS
Agenda
Introduction
Who is IPA?
Labor Productivity in a Hot Market
Improving Labor Productivity
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INDEPENDENT PROJECT ANALYSIS
WORSE
Construction Productivity
Deteriorated in the Hot Market
BETTER
Construction Productivity Index
1.20
1.10
1.00
0.90
Yearly Moving Average
Hot Market
0.80
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INDEPENDENT PROJECT ANALYSIS
Labor Productivity Was Not the Root Cause
• Labor productivity was the proximate cause of
failures in past hot markets, but not the root cause
‒ It is a symptom of much deeper problems
‒ Poor construction management contributed to the
problem but also did not cause it
‒ Poor controls also exacerbated, but did not cause, the
problem
• Engineering problems were (and always will be) the
principal cause of poor craft productivity
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INDEPENDENT PROJECT ANALYSIS
24
Project Behavior in a Hot Market
• Engineering started earlier
‒ Projects increased overlap of engineering and definition in hot
market
‒ Scope was not closed when long leads were ordered
• Vendor data were frequently late (driven by changes)
• Engineering slipped more
• Construction started on time (before engineering was
half done)
• Labor productivity was poor
• Construction slipped more
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INDEPENDENT PROJECT ANALYSIS
The Downward Productivity Spiral
Incomplete Scope
and FEL
Late Engineering
Poor Quality Engineering
Overextended
Engineering Contractors
Schedule-driven
Businesses
Late Materials
Tight Engineering Schedules
Premature Field Start
Late Permits
Add (poor) Labor,
degrading existing
Poor Labor Productivity
Falling Behind in
Field
Poor Controls
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INDEPENDENT PROJECT ANALYSIS
Agenda
Introduction
Who is IPA?
Labor Productivity in a Hot Market
Improving Labor Productivity
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INDEPENDENT PROJECT ANALYSIS
Practices That Improve Labor Productivity
• Performance in the field is heavily influenced by what
precedes construction
• Understanding front-end practices (design, planning,
and controls) can provide a more systematic way of
addressing labor risk
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INDEPENDENT PROJECT ANALYSIS
Hot Markets Increase the Cost Penalty
of Poor FEL
Worse
1.40
Cost Index
1.30
1.20
1.10
1.00
Better
0.90
BEST
GOOD
FAIR
POOR
INADEQUATE
Front-End Loading Index at Sanction
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INDEPENDENT PROJECT ANALYSIS
Hot Markets Increase the Cost Penalty
of Poor FEL
Worse
1.40
Cost Index
1.30
Hot Market
1.20
1.10
Normal Market
1.00
Better
0.90
BEST
GOOD
FAIR
POOR
INADEQUATE
Front-End Loading Index at Sanction
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INDEPENDENT PROJECT ANALYSIS
IPA’s Front-End Loading Index
A Measure of Execution Risk
Site
Definition
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Engineering
Definition
31
Project
Execution
Plan
INDEPENDENT PROJECT ANALYSIS
Site Definition In a Hot Market
• In USGC, industry record on site definition tends to
be better than other locations
• However, hot markets put more pressure on projects
to follow every step, look at every deliverable
‒ Not form over substance!
• Environmental permitting can be a surprise in a hot
market
‒ Permit durations grew 300-400%
• Final HAZOPs provide an opportunity to slow down
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INDEPENDENT PROJECT ANALYSIS
Measuring Engineering Definition at Authorization
Both the “What” and “Who” Matter
Site
Definition
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Engineering
Definition
33
Project
Execution
Plan
INDEPENDENT PROJECT ANALYSIS
Quality of Engineering Definition
• The quality and completeness of the basic design
package are drivers of how reliable the quantity
take-offs can be, which, in turn, directly relates to
the labor hours required
• IPA measures engineering definition as an element of
Front-End Loading using the following ratings:
‒ Screening Study
‒ Limited Study
‒ Advanced Study (Best Practical)
‒ Full Design
* The appendix includes the engineering rating definitions
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34
INDEPENDENT PROJECT ANALYSIS
Quality of Engineering Definition Drives
Labor Hour Growth and Changes
Worse
35%
Pr < 0.001
 = +14%
30%
Labor Hour Growth
25%
20%
15%
10%
5%
0%
Better
Full
Design
*Advanced
Study
Screening
Controlled for Multiple Factors
*Best Practical at Authorization
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Limited
Study
35
INDEPENDENT PROJECT ANALYSIS
Fully Define the Execution Schedule to Improve
Field Productivity
Site
Definition
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Engineering
Definition
36
Project
Execution
Plan
INDEPENDENT PROJECT ANALYSIS
Driving Schedule Hurts Labor Productivity
• Project teams attempt to shorten schedules in a
number of ways
• One of the most common is to increase the overlap
between the engineering and construction phases
• If field mobilization begins with insufficient design or
lagging procurement, field productivity is eroded and
labor hours grow
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INDEPENDENT PROJECT ANALYSIS
Overlap Between Engineering and Construction
Larger Projects Are Hurt More
Worse
50%
Labor Hour Growth
40%
30%
20%
Better
10%
0%
20 Percent Average
Overlap
$50 MM
40 Percent Average
Overlap
30 Percent Average
Overlap
$250 MM
$500 MM
Controlled for Multiple Factors
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INDEPENDENT PROJECT ANALYSIS
Project Controls Reduce Schedule Slip
Physical Progressing of Both Engineering and Field Labor Improves Performance
50%
Execution Slip
P r < 0.0001
40%
30%
20%
10%
0%
6 Good
5
4 Fair
3
2 Poor
1
Deficient
0
Project Control Index
* Controlled for FEL
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INDEPENDENT PROJECT ANALYSIS
Conclusion
• It is likely that the US labor market will be constrained
in the coming years
• There are several strategies to address the risk of
labor shortages
• One key strategy is improving labor productivity:
getting more from less
• There are early levers – focused on rigor in the front
end process – that you can turn to achieve better
productivity in the field
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INDEPENDENT PROJECT ANALYSIS
Practices That Improve Labor Productivity
Practices That Reduce Field Hours
In Project Team
Control in a Hot
Market?
High Skill Craft Labor
NO
High Skill Supervision
NO
Best Practical Engineering Definition
YES
Fully Defined Execution Schedule
YES
Non-Aggressive Schedule / Overlap
YES
Effective Controls / Physical Progressing
YES
No Scope Changes
YES
Hot markets are less forgiving of early errors
and oversights.
Follow your work process!
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INDEPENDENT PROJECT ANALYSIS
Thank you for your attention
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INDEPENDENT PROJECT ANALYSIS