The overheating global project economy has put the once-depressed engineering and construction (E&C) community back on to the front foot. But it also raises the spectre of risk for both contractors and their clients as human, material, logistics and financial resources are leveraged to near unprecedented levels.
In many cases in South Africa, project owners have leveraged their human resources at a ratio of one to 100. In other words, the client often has just one person for every 100 contractor and subcontractor staff.
The idea is to access skills in the C&E community immediately, while, hopefully, developing more of these resources internally as the projects evolve. This is a natural and obvious response to the skills challenge, but appears to be exacting a toll.
Already, the vast majority of megaprojects, which are projects valued at more than $1-billion, are running behind schedule and over budget, while that once nearly forgotten word, ‘escalation’, has crept back into the lexicon of just about all project practitioners. In fact, Flour USA senior vice-president Mark Stevens recently referred to escalation as “that sleeping bear coming out of hibernation”.
Speaking at the inaugural Engineering & Construction Risk Institute’s (ECRI’s) South African Project Risk Forum held in Johannesburg recently, Stevens lamented the fact that there were so many ‘losing projects’ currently under way.
This assessment is confirmed by a recent Independent Project Analysis study, which shows that some 80% of major projects were currently underperforming.
Losing projects are generally defined as those that are not only behind schedule and over budget, but where start-up and operational problems are common. But Stevens has added a fourth dimension, which is where contractors fail to turn a profit.
The causes are diverse and numerous, ranging from the fact that the E&C industry and the supplier community have been slow to upscale in response to surging demand, through to a serious shortage of skills throughout the project value chain, from project managers and controllers to artisans.
But one other element highlighted by Stevens, whose global exposure has offered him almost unique visibility of the challenges, is unwillingness among clients.
WHEN THE CURE IS THE DISEASE
This is resulting in a “risk rationalisation” mentality, which he labelled as the “cure that is really the disease”.
By way of example, he related this almost apocryphal story about the project environment in the US power sector, which, like South Africa’s, is undergoing far-reaching expansion. But unlike South Africa, the utilities pursuing the growth are generally listed entities, which adds the crucial dimension of shareholder satisfaction.
It ran as follows: “We had been retained to build what could be the first new nuclear power plant in the US in about 25 years. Now, we were meant to deliver our estimate to the client on a certain Thursday. However, on that Monday, the CEO of the utility announced to the press the estimated capital cost of the facility. The problem was that we were sitting with an estimate that we were about to deliver that was literally two times what he went out to say. We soon realised that his number was based on a dollar/kilowatt for a coal-fired station,” Stevens related.
He continues: “We delivered that estimate and you can well imagine what happened – the entire project team saw their careers evaporating. So, they came back and said, ‘This just won’t work – we are going to lose the project’. Then they asked us to restate our estimate and told us to take out escalation, contingency and fee. We said, ‘All these things are costs and you are going to get them’. Their reply was, ‘It is too early to estimate what they are, anyway’.”
What happened next? “We did as they asked, but that still didn’t get them anywhere near where they wanted to go, so they then said, ‘The last plant of this design was built in Japan, therefore, you should use the labour- productivity estimates achieved there’. So, they dictated that we change our labour-productivity estimates, which were based on South Texas averages, where the project was meant to be built, to those achieved on the Japanese facilities,” Stevens concluded, stressing that this was but one example of not facing up to reality and that it was not an isolated case.
This kind of risk rationalisation, while saving the project from being shelved, also creates all the ingredients for a ‘losing project’. Stevens stresses that, in an E&C environment, risk rationalisation is a natural fallback position, given that every project is a prototype, in a distinctive outdoor environment, with a unique logistics plan and a project-specific workforce.
In a heated marketplace, the combination of increased escalation and risk rationalisation is a ‘toxic cocktail’, where the E&C industry becomes accepting of schedule and price slippages, which creates the conditions for losing projects and adversarial relations with project owners.
Therefore, he asserts that the real cure resides in the creation of risk processes that ensure ’risk realisation’, incorporating a common risk language, uniform processes, disciplined and continuous monitoring and review, and a frank dialogue with clients on which party can best price risk.
He argues, too, that the mitigation of last resort should be to add “risk dollars” to a project’s cost profile.
In regard to establishing such risk-management protocols, some 36 international E&C companies, including Aveng, Bateman Engineering, Group Five and Murray & Roberts, have joined forces to support the ECRI – the combined revenues of these organisations is currently $170-billion.
The organisation, which is registered in Washington State, US, has been created to increase awareness of risk-management gaps in the global engineering and construction industry, as well as offer insight into global best practices.
London-based ECRI president and MD Rod Kyle says that there is a growing realisation that billions of dollars is being lost by E&C com- panies owing to inadequate risk management, while project owners are also growing increasingly frustrated by the increasing number of under- performing projects.
This frustration has been most robustly expressed by Sasol Technology GM Dirk Lourens, who warned E&C contractors “not to slaughter the goose that lays the golden egg” by transferring all the risks to project owners, which will, ultimately, be forced to cancel projects that are no longer feasible on a reassessment of the risks and the rewards.