How Contingency Calculation Is Different Before and After the Final Investment Decision

During a project development phase, estimating uncertainty will typically decrease as project maturity increases. At the same time, the estimates will include some contingency. What are the expected levels of uncertainty and contingency, and how to evaluate them in a mutually exclusive manner? Why is the approach different from the project execution phase? Our new White Paper 2024-06 ‘Managing Contingency and Uncertainty During Early Project Estimates: How Contingency Calculation Is Different Before and After the Final Investment Decision’ delves into more detail on the issue of contingency and uncertainty evolution during project development, and the differences with project execution.

During the project development phase, the uncertainties need to be considered carefully, based on experience, to ensure that expectations are managed as to the final estimate at Final Investment Decision. The contingency element included in the base estimate must be focused on identified risks, and the uncertainty element estimated separately based on project development stage and benchmarks.

At this stage, it is important that the elements included in both uncertainties and contingency are mutually exclusive, to avoid double dipping.

When in execution phase, contingency generally includes both elements of discrete risks and more systemic risks and uncertainties, therefore the basis of calculation will change. This is not always fully understood and needs to be carefully communicated to the decision-maker to make sure the project remains well protected against unexpected events.

Read our new White Paper 2024-06 ‘Managing Contingency and Uncertainty During Early Project Estimates: How Contingency Calculation Is Different Before and After the Final Investment Decision’ to better understand the definitions and usage of uncertainties and contingency at various stages of the project.

If you can’t access the link to the white paper, copy and paste the following link in your browser: https://www.projectvaluedelivery.com/_library/2024-06_contingency_vs_uncertainty_v0.pdf

Benefits and Limitations of Project Modularity – Towards a Trend of Facilities Built of Smaller Components produced in Series

Modularity and the series effect are key success factors for large industrial projects. They improve performance, reliability, reducing the likelihood of dramatic failures. This concept is discussed in the book ‘How Big Things Get Done’ by Bent Flyvbjerg and Dan Gardner. It is leading to significant business model transformations in some industries. In our new White Paper 2024-05 ‘Benefits and Limitations of Project Modularity – Towards a Trend of Facilities Built of Smaller Components produced in Series‘, we explore the advantages, drawbacks and limitations of this approach.

We believe that it is a definite trend that industrial facilities will be designed to be increasingly modular, which has the benefit of avoiding excessive process scalability concerns. When possible, the combination of modularisation and standardisation can be a major driver of project performance and project delivery reliability.

However, this approach is not always applicable or cost-effective and also comes with drawbacks that need to be carefully considered in view of the circumstances of the project. Furthermore, the multiplicative nature of series projects can create significant variances in case of poor estimating of time and cost for the individual item.

Modularisation and standardisation are a trend that requires higher level of reliability and quality of the project management processes, and greater maturity of the organisation, in all aspects of project management and industrialisation. This needs to be taken seriously upfront to be successful in these modern industrial approaches.

In our new White Paper 2024-05 ‘Benefits and Limitations of Project Modularity – Towards a Trend of Facilities Built of Smaller Components produced in Series‘, we explore in detail what are the key drivers and success factors leading to improved performance through modularisation and series effect.

If you can’t access the link to the white paper, copy and paste the following link in your browser: https://www.projectvaluedelivery.com/_library/2024-05_project_modularity_v0.pdf

Why It is Essential to Understand the Impact of Forgetting Quantity Allowances When Buying Material for Industrial Projects

Recent PVD experience highlighted the need to remember that there is a substantial difference between the quantities that are produced by the designer and those that need to be procured by the project. It affects both the cost forecast and the efficiency of construction if insufficient quantities have been ordered. Our new White Paper 2023-11 ‘Understanding the Impact of Forgetting Quantity Allowances When Buying Material for Industrial Projects’ reminds some basic rules about bulk quantities for industrial projects.

Inadequate estimation of quantity allowances can lead to either ordering insufficient, or excessive material. For the design related allowances, it may also affect weight control, which in certain instances is an essential parameter for infrastructure performance (floating infrastructure, modules that need to be heavy-lifted, seismic calculations etc).

We still sometimes (too often) find projects that completely forget to include allowances on top of the design software material quantities, which leads to lacking material when the project reaches 70-80% progress, with substantial consequences in terms of cost and reputation.

Bulk material ordering is too often not taken sufficiently seriously in project planning, maybe because it looks less noble or urgent than complicated equipment procurement. Still, inadequate quantities ordering may lead to significant consequences.

Projects must fully understand the difference between designed, erected and procured quantities and the ratios between those quantities to adequately forecast material cost and ensure that there is no stoppage of the project construction due to lack of material. Less mature organisations may lack precise allowance ratios based on experience or forget to apply those altogether, leading to situations with potentially very damaging consequential impacts, in particular when bulk material is missing while the construction team and the site are mobilised. Discover more in our new White Paper 2023-11 ‘Understanding the Impact of Forgetting Quantity Allowances When Buying Material for Industrial Projects’

If you can’t access the link to the white paper, copy and paste the following link in your browser: https://www.projectvaluedelivery.com/_library/2023-11_forgetting_quantity_allowances_v0.pdf

Why is There a Need for Owners to Produce End-of-Development Phase Reports?

When supporting owner clients, we are often challenged over the need to develop full reports at the end of project development phases (such as scoping, preliminary feasibility and detailed feasibility). Still, we do insist on the production of those reports. Our new White Paper 2024-04 ‘Why is There a Need for Owners to Produce End-of-Development Phase Reports?’ explains why it is important to invest the time in producing those comprehensive reports.

When an owner develops a project, a gate-based process is generally applied with key milestones where the project maturity gets reviewed and go/no-go decisions are taken on the project.

At that occasion it is common practice for the project development team to produce a comprehensive report describing the current maturity. This report generally contains an executive summary, and detailed chapters covering all aspects of the project, technical maturity, understanding of project environment in its wider sense, and preparedness for the next project phase.

However, producing such a report is quite an onerous and time-consuming process and we are often challenged on the need to produce such a deliverable: would it not be sufficient to show the set of available deliverables from the various studies that have been conducted during the last project development phase in a PowerPoint summary presentation?

If the project team skimps on the production of the report, and this is accepted by project governance, we have observed the following major consequences:

• Consistency of all the studies performed is not verified, leading to an unsound basis for future studies,
• Lack of assurance that estimates are all based on the basis of a consistent set of assumptions, and that their uncertainty level is consistent across the board,
• Possible blind spots in the value chain of the project either in execution or in terms of project scope, and in the risk analysis of the project
• Frequent lack of maturity of the project preparedness for the next phase (as this is generally not part of the natural deliverables of the previous phase).

We really recommend owner teams to take the time and effort to step back and produce comprehensive reports of the project maturity status at the end of each project development phase, and in preparation for the decision milestones.

It is time that will be well spent taking a high level, systemic view of the project, ensuring consistency across the board, and possibly questioning some assumptions. In addition to ensuring a better project maturity at the milestone, it will feed the next project phase with the right objectives and activities to make the project more successful. Discover more in our new White Paper 2024-04 ‘Why is There a Need for Owners to Produce End-of-Development Phase Reports?’

If you can’t access the link to the white paper, copy and paste the following link in your browser: https://www.projectvaluedelivery.com/_library/2024-04_why_development_milestone_reports_v0.pdf

How Logistics is a Major but Underestimated Contributor to Project Risk

Based on our experience consulting for large, complex industrial projects globally, we find that logistics is a major source of disruption to projects, while not being identified as such in most risk assessments and project organisations. In our new White Paper 2024-03 ‘How Logistics is a Major but Underestimated Contributor to Project Risk’ we investigate this issue, why it is underestimated, and what can be done to address effectively this risk area.

In our experience, there are roughly two different categories of logistics risks: loss and damage during transportation to site, and on-site logistics driving erection productivity.

Loss and damage during transportation is much more prevalent than generally considered. In a dozen years’ experience as project consultants on major industrial projects, we can’t count projects that have been put in jeopardy (or have been very closely jeopardised) because of ships sinking, containers being lost at sea, lifting mishaps, out-of-size convoy trailers encountering bridges and other obstructions… resulting in the damage of key pieces of equipment requiring long durations for replacement. The consequential impact of such events on projects can be significant, orders of magnitude more than any compensation by insurance of the actual event.

Worksite logistics from lay-down and prefabrication areas to erection areas is a major driver of on-site productivity. While in this case damage appears to occur less frequently, the general organisation of logistics on the worksite is often under-analysed resulting in major project impacts in terms of erection productivity and schedule. Often, the erection teams are blamed for productivity shortfall while the issue may actually be more due to the logistics arrangements that create bottlenecks or do not deliver material in a way that is easily usable by erection teams. Productivity issues during erection where large teams are mobilised on site have very significant impacts on project cost and schedule.

Logistics is an underestimated area of project performance risk, and it comes to play much more frequently than estimated in large, complex, international industrial projects. This applies both to off-site logistics and to on-site logistics feeding erection. As logistics is considered a secondary function it often does not receive adequate attention during the planning and risk mitigation assessment stage. Our recommendation is to increase this level of attention by mobilising experienced professionals early in the project and providing them with the means to effectively control the key critical points in the project logistics setup. Discover more in our new White Paper 2024-03 ‘How Logistics is a Major but Underestimated Contributor to Project Risk’

If you can’t access the link to the white paper, copy and paste the following link in your browser: https://www.projectvaluedelivery.com/_library/2024-03_logistics_major_risk_area_v0.pdf

Why it is Important to Rationalise Procurement Documentation in Large Complex Industrial Projects

On large projects, the documentation provided to support procurement can often be extensive. The large number of documents produced by different originators can sometimes result in contradictory requirements, are often not rationalised, and may become unmanageable by smaller suppliers This is often a blind spot of client organisations that rely on different subject matter experts to provide their requirements. In our new White Paper 2024-02 ‘Why it is Important to Rationalise Procurement Documentation in Large Complex Industrial Projects’, we investigate closer this issue and what can be done to address it.

Documentation sent to prospective and chosen suppliers will generally include a set of general requirements and specifications, and a set of specific requirements and specifications for the product or service being acquired.

Sets of general requirements and specifications can sometimes be extremely extensive, covering many areas starting with safety, quality, general technical specifications, logistics and delivery, etc. The owners of those specifications are internal technical authorities on the various subjects. This set of documents can easily represent thousands of pages, in particular if the client has significant project experience in many different situations. Being general requirements not everything is applicable to the particular case, nevertheless it is often easier for the client organisation to just send over the full body of general documentation. In certain cases, as various sections will have been written by different departments of the client organisation, internal consistency is not assured even within the general specifications.

Specific requirements and specifications will be based on the specific engineering performed by the project. It may complement or even contradict the general specifications. However, for expediency purpose, it will often simply be sent on top of the general documentation, with a statement that in case of contradiction, the specific (or the most stringent) takes precedence. The rationalisation of requirements is left to the supplier, which may not have the resources or capability to do so.

The supplier will therefore receive thousands of pages of general specifications, most of which are not really applicable, and hundreds of pages of specific requirements, some of which may be contradictory and with no clear process for deciding what is really applicable.

Lack of rationalisation of requirements and specifications, combined with their natural inflation over time, is a major impediment to productivity in a world where the number of requirements tends to grow significantly due to regulatory evolution and search for more complicated functionalities. Significant effort has to be taken at organisational and industrial branch level to rationalise them and ensure that they are transferred and understood by suppliers. This is still often a blind spot for many organisations that must be identified and addressed. Discover more in our new White Paper 2024-02 ‘Why it is Important to Rationalise Procurement Documentation in Large Complex Industrial Projects’.

If you can’t access the link to the white paper, copy and paste the following link in your browser: https://www.projectvaluedelivery.com/_library/2024-02_procurement_docs_rationalise_v0.pdf

How to Complement Statistical Quantitative Risk Analysis with Scenarios Approaches

Quantitative risk analysis on large complex projects is often performed using statistical tools based on Monte Carlo approaches, applied for cost and schedule. These approaches can be supplemented by scenario analysis, in which a number of risk and opportunity factors are combined in scenarios of different probabilities of occurrence. Reviewing the consistency of the outcomes of the two techniques will increase the resilience of the risk analysis result. In our new White Paper 2024-01 ‘How to Complement Statistical Quantitative Risk Analysis with Scenarios Approaches’, we examine how scenario analysis can be deployed and how to use its results.

Both scenario analysis and statistical risk analysis are the result of a modelling of the project. A model is a representation of an item that is simplified and generally geared towards a specific purpose. Therefore, the outcomes of those processes are various models of the project, that can be tested and updated using the models’ key parameters and assumptions. The combination of a variety of models based on different sets of mechanisms and assumptions generally allows to better understand reality, as seen from multiple angles. This is the approach proposed.

Since the two techniques model the project according to different approaches, the important issue is to check the consistency of the outcomes for similar class of probability. Consistency between the results provided by statistical analysis and scenario analysis will improve confidence in the risk analysis results, while inconsistencies will raise questions to be resolved. In particular, non-linear effects such as ‘cliff effects’ (small variations of parameters leading to substantial changes of the outcome in terms of cost or schedule) or an accumulation of consequential impacts can be much easier identified and modelled in the scenario approach. They will generally not be identified in Monte Carlo analysis, possibly leading to a greater spread of outcomes for the scenarios.

Combining diverse types of risk modelling is useful to improve confidence in contingency. Scenario-based models are useful complements to the usual Monte Carlo approaches and allow to identify specific non-linear effects that may be difficult to apprehend otherwise. Ensuring consistency between the various types of models provides further analysis on possible impacts of risks and opportunities and therefore will enhance the reliability of the quantitative risk process, and thus this approach to combine different types of models is highly recommended. Discover more in our new White Paper 2024-01 ‘How to Complement Statistical Quantitative Risk Analysis with Scenarios Approaches’.

If you can’t access the link to the white paper, copy and paste the following link in your browser: https://www.projectvaluedelivery.com/_library/2024-01_scenario_vs_statistical_v0.pdf

How to Pivot during the Execution Phase of a Large Complex Industrial Project

While this situation should be avoided by a proper project definition phase, it is sometimes necessary to substantially pivot and change course during the execution of a project. This implies significantly changing the project objectives and/or execution strategy. This situation necessarily creates substantial disruption. Based on our experience, our new White Paper 2023-12 ‘How to Pivot during the Execution Phase of a Large Complex Industrial Project’ describes good practices should this situation happen.

For owners, this can happen due to a number of events:

• significant regulatory changes (or more generally, changes to stakeholder requirements),
• changes in the facility product fit to the market, requiring a change to the product,
• unexpected changes to the main feedstock,
• unexpected difficulties in an innovative section of the facility,
• default of major contributor or contractor that is difficult to substitute.

For contractors, most such issues will be managed through a renegotiation of the contract with the owners. However, in some cases, EPC contractors can experience a need to pivot when the project execution strategy envisaged is not possible, e.g. due to the lack of availability of a difficult-to-substitute construction resource, requiring a substantial change of strategy.

Because those situations necessarily create significant disruption, additional costs and duration, they should be avoided as much as possible by a thorough and in-depth project development and preparation phase. Those situations are however more likely to happen on innovative projects, or very long projects (spanning more than a couple of years) due to project environment changes.

We first recommend to take time to clearly define the revised project. This requires the mobilisation a small task force to go through a scoping and feasibility phase before being able to commit to the pivoted project. This re-definition phase of the pivoted project will also allow to understand fully the direct and indirect consequences of the pivot. To minimise disruption to ongoing activities, this task force should remain discrete and not communicate its work to the rest of the project.

Significantly pivoting an industrial project during its execution must be avoided, but when it happens, specific measures must be taken to address the situation. The objective is to develop a sufficiently mature definition of the new project and its execution plan while not disturbing the rest of the project. This requires a separate taskforce to be setup and managed, producing a sufficient level of definition, and a clear transition and change plan for the moment where the pivoted project will be revealed to all contributors. Failure to maintain confidentiality, to achieve a sufficient level of maturity for the pivoted project or to address change management properly, will have strong negative impacts on the project. Discover more in our new White Paper 2023-12 ‘How to Pivot during the Execution Phase of a Large Complex Industrial Project’

If you can’t access the link to the white paper, copy and paste the following link in your browser: https://www.projectvaluedelivery.com/_library/2023-12_how_to_pivot_project_in_execution_v0.pdf

How to Improve the Management of Large Numbers of Punch Points and Design Open Points in Large Complex Projects

During the later phases of industrial projects, design Open Points can be identified during detailed design or fabrication design that require treatment to ensure the overall consistency of the facility design. Punch Points are also identified during commissioning and pre-hand-over that generally need to be rectified prior to hand-over or startup. The traditional management approach is to use registers, some prioritisation and assign points for action within the project team. When such open and punch points are numerous, other alternative approaches can be used that are more effective. In our new White Paper 2023-10 ‘How to Improve the Management of Large Numbers of Punch Points and Design Open Points’ we address how the management of such large registers of open or punch points can be done differently.

To manage the sometimes thousands or tens of thousands of Open Points and Punch Points generated continuously on large industrial projects, the conventional approach is to open and manage a register and manage each item individually.

Good practices in the traditional approach also include assignment of a priority and/or criticality level to the Open or Punch points.

Faced with a large register of Open or Punch Points, the tendency will generally be to address the easiest to resolve first, which makes it important to have, if possible, statistics that account for the closure effort so as not to be overly optimistic on the closure rates. Thus, generally the harder points remain for closure for quite a longer time; they also often need a multi-disciplinary approach. This does not make sense if the number of open points is very large.

The management of large quantities of Punch Points and Open Points on large industrial projects can become very tedious and cause significant delays in the commissioning and start-up of the facility. Traditional approaches using registers and individual assignment of Punch or Open Points to contributors have strong limitations when they become very numerous. It is then much more effective to create a limited number of projects with dedicated and accountable personnel dealing with certain types of Open or Punch Points to accelerate resolution, identify and address root causes, thereby diminishing the future number of Open or Punch Points. Discover more in our new White Paper 2023-10 ‘How to Improve the Management of Large Numbers of Punch Points and Design Open Points’.

If you can’t access the link to the white paper, copy and paste the following link in your browser: https://www.projectvaluedelivery.com/_library/2023-10_treatment_OP_tickets_v0.pdf

Why an Independent Facilitator is Important When Setting up Integrated Extended Enterprise Teams for Complex Infrastructure Projects

To address the complexity of major industrial projects, collaborative extended enterprise setups or even contractual alliances are implemented. They often fail to deliver the expected value or performance. We have found that a number of precautions including the involvement of a neutral third party from the onset are useful success factors. Our new White Paper 2023-09 ‘the Importance of an Independent Facilitator When Setting up Integrated Extended Enterprise Teams for Complex Infrastructure Projects’ details this particular approach to extended enterprise setups.

Large industrial projects, and particularly innovative, first-of-a-kind projects that also show a high level of equipment density, involve a number of specialist contractors in a very intertwined manner. Design and then execution requires a very high level of collaboration. This is even more the case if numerous iteration loops are needed during design, and if multi-disciplinary coordination is needed for erection.

Various opportunities can be identified to improve collaboration effectiveness, which are listed in the White Paper.

Responding to the complexity-challenge of large industrial projects is a major success factor. Various collaborative setups have been tested but have shown limitations.

We are convinced that a key to success is the involvement of a neutral facilitator from the onset. This is definitely a trend in contract management with independent engineers or dispute boards being called upon in FIDIC and NEC contract forms.

The neutral party needs to be mobilised from the start of the project and follow it up to be effective. It will allow to address issues before they fester and even before they become claims. It can raise concerns at the governance / steering committee level.

Based on our experience and track record, the intervention of a neutral party to facilitate and assure collaboration during the project is an essential success factor that is increasingly promoted in construction contract management and needs to be used with more frequency. This should be deployed more often and from the setup of the project. Discover more in our new White Paper 2023-09 ‘the Importance of an Independent Facilitator When Setting up Integrated Extended Enterprise Teams for Complex Infrastructure Projects’.

If you can’t access the link to the white paper, copy and paste the following link in your browser: https://www.projectvaluedelivery.com/_library/2023-09_setting_up_integrated_collaborative_v0.pdf