The Future of Capital Project Risk Reduction
Fall of the Big EPC
The engineering procurement and construction (EPC) industry performance decline originated decades ago with a procurement centric “lowest-cost” methodology of awarding work on capital investments. Providers of EPC services have experienced declining margins; resultantly drifting away from proven best practices and adopting alternative execution strategies to maintain profitability. EPC providers were hit hard by the 2008 financial crisis which initiated a tsunami of company consolidations that continues today. Reduced competition and razor thin margins have led to reductions in development and training translating to a decline in project management capabilities forcing owners and investors to endure increased risks when executing capital investments. Independent Project Analysis (IPA) data from 2020 shows that nearly 70% percent of capital projects experience significant cost overrun and finish late. Below is an overview of the decades long decline in capability the EPC industry.
Amplified Risk – The Year of COVID-19
The current world pandemic is exposing the additional risks owners and investors are facing in deploying capital. Top tier EPC providers are further reducing resources, low cost supply channels are experiencing pandemic related supply chain delays and increased cost of business and international purchases are caught in tariff wars. Second tier suppliers are attempting to step up and fill industry voids, often lacking the experience, skills, and systems to be efficient and predictable. From an owner or investor perspective, it is risk, risk, risk, and more risk. Capital expenditures, this year, across the globe have been reduced 34% due to the complications of the pandemic.
Immediate Solutions for Owners and Investors
Utilizing contracted resources or Project Management Organizations (PMO) to augment an owner/investors project management team reduces risks that owners face in executing capital projects. Contracting key resources keeps the project management staff costs variable to the owner, saving direct employment costs associated with work streams that tend to be intermittent and outside of the direct revenue stream. A skilled PMO contractor brings depth of project management experience, proven management tools and techniques, and broad lessons learned knowledge to the owner organization. Since PMO contractors integrate with the owners’ own resources, utilizing contracted resources is flexible, often targeting skills and experience augmentation of the owner’s direct staff. When owner’s/ investors are unaccustomed to managing capital projects, an entire contracted PMO/CM team can be put in place to manage the project. As a result of the PMO’s sole role in the project being project management, no other contractual relationships compete or skew the focus of the team.
Maximizing Benefit – Early Engagement
Early involvement of a PMO increases the benefits of engagement for the Owner, improving the risk profile by performing vital due diligence, option analysis, and risk analysis/mitigation prior to full funding. Early engagement fosters the structuring of reporting and monitoring with meaningful owner-centric metrics that serve as the road map to project completion. Contracted PMO resources integrated with an Owner’s team, working for a common purpose, bolster performance and predictability. PMO’s with this direct alignment of purpose can monitor and report on project progress with unbiased clarity. Below is a graphic that represents the impact of early decision on cost that diminishes over the project timeline.
Global Management Partners
Global Management Partners (GMP) is an owner centric PMO company, our employees are hand selected based on contributions they have made on previous capital projects. Many of our employees gained their experience with capital projects in roles on the owner’s side and on the contractor’s side, providing full perspective of motivations. GMP’s definition of a successful project extends past substantial completion, commissioning, start-up, into initial operations and maintenance. All aspects are necessary for an owner/investor to realize a successful project.
About the author:
Global Management Partners
Price has over 25 years of experience in project engineering and EPC execution with both domestic and international projects primarily in an “Owner Role”. He is responsible for the successful project execution with direct oversight of $6 billion. He has significant experience in pulp & paper, consumer products, petrochemical, pharmaceutical, plastics & polymers, water and waste treatment projects and industries. Price has a record of proven project delivery meeting, or exceeding company defined goals.