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Overview of the Global Project LandscapeAdvanced Work Packaging Conference 2014
October 7, 2014Houston, Texas
Stephen P. Mulva, Ph.D.Associate Director, CII
Dr. Stephen P. Mulva
• Associate Director of the Construction Industry Institute; University of Texas at Austin
• Lecturer, Researcher, and Consultant in the benchmarking of capital projects
• Program Management Expert• Former employee of Fluor
(Constructability Coordinator and Field Engineer), Phillips Petroleum, Bechtel, ePM, and Texas State University
Construction Productivity Decline
Productivity Index (1964-1999)(Constant $ of contracts / workhours of hourly workers)Sources: U.S. Bureau of Labor Statistics, U.S. Dept of Commerce
All Non-Farm Industries +1.71%
Construction Industry-.48%
Source: Journal of Construction Engineering and Management(Sept./Oct. 2001)
Actual / Estimated Peak Construction Workforce
Actual/ Estimated Peak Construction Workforce
Pro
ject
Cos
t G
row
th
3.02.52.01.51.00.50.0
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
PROJECT PERFORMANCE PREDICTABILITY RESEARCH(IMPACT ON FINANCIAL RETURNS)
CII Owners’ Capital Efficiency(Ratio of Cash Flow (CFfOA) to Construction In Progress (CIP))
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
3.6
3.8
4.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
CAfO
A/CI
P
Year
2.53 (2012)
3.68 (1999)
N=64Early 1990sRecession
Early 2000sRecession
Late 2000sRecession
Correlation between Construction In Progress (CIP) and Cash Flow (CFfOA) for CII Owners
R² = 0.88
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Corre
latio
n Co
effic
ient (
betw
een
CIP
and
CFfO
A)
Year
95.2% (1991)
20.2% (2008)
N=64
CII Owners’ Weighted Average Cost of Capital (WACC)
R² = 0.7079
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Weig
hted
Ave
rage
Cos
t of C
apita
l (%
)
Year
Avg. WACC = 8.2%
N=64
Capital Project Performance - CII Owners
Project Cost Growth
Owner (NTotal=975)
-10% 10%
10%
-10%
-3.0% 3.0%
2.7%
-2.7%
Project Schedule Growth
N=310 (31.8%)Avg. Cost Growth = -10.2%Avg. Schedule Growth = 29.1%
N=239 (24.5%)Avg. Cost Growth = 16.2%Avg. Schedule Growth = 32.0%
N=102 (10.5%)Avg. Cost Growth = 12.3%Avg. Schedule Growth = -9.8%
N=271 (27.8%)Avg. Cost Growth = -12.7%Avg. Schedule Growth = -8.2%
N=53 (5.4%)Avg. Cost Growth = -0.47%Avg. Schedule Growth = 0.24%
69.7% Projects Not Shown
Cash Flow for an “Average” CII Owner Project
-$5 M
-$20 M
-$40 M
$9.5 M
$14.4 M
-$50
-$40
-$30
-$20
-$10
$0
$10
$20
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Cash
Flo
w ($
Milli
on)
Year
“Average” CII Owner Project = $65 Million
Slope of Revenue = 2.7% per year(Incremental Rate of Corporate CFfOA)
IRR = 14.1%
20 years
Startup
CII Calculated Hurdle Rate For Industrial Projects
“Average” CII Owner Projected Cash Flow
(Morningstar Estimated Hurdle Rate for Oil and Gas Companies = 14.7%)
Cash Flow Diagram for an “Average” CII Owner(Includes Forecast 2012 - 2016)
Predicted CIP
Predicted CFfOA
UCL_CIP
LCL_CIP
LCL_CFfOA
UCL_CFfOA
-$4,000
-$3,000
-$2,000
-$1,000
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Cash
Flo
w ($
Milli
on)
Year
CIP CFfOA Predicted_CIP Predicted_CFfOA
$ 4.107 Billion(2012)
-$ 2.165 Billion(2012)
Source: Capital IQ Courtesy of McCombs School of Business, UT Austin
Cost Growth = 16.2%Schedule Growth = 32.0%
-$4,000
-$3,000
-$2,000
-$1,000
$0
$1,000
$2,000
$3,000
$4,000
$5,000
2011 2012 2013 2014 2015 2016 2017 2018
Cash
Flo
w ($
Milli
on)
Year
$4,017 M $4,155 M $4,292 M $4,430 M $4,567 M
-$2,165 M -$2,268 M -$2,372 M -$2,476 M -$2,579 M
Scenario 1: High Cost and Schedule Growth
-$4,000
-$3,000
-$2,000
-$1,000
$0
$1,000
$2,000
$3,000
$4,000
$5,000
2011 2012 2013 2014 2015 2016 2017 2018
Cash
Flo
w ($
Milli
on)
Year
$4,017 M $4,155 M $4,292 M $4,430 M $4,567 M
-$2,516 M -$2,635 M -$2,756 M -$2,877 M -$2,997 M
NPVTarget= $7.6 Billion NPVScenario 1= $5.7 Billion25.3% Loss of NPV
As-Is Cash Flow
To-Be Cash Flow
Cost Growth = -12.7%Schedule Growth = -8.2%
Scenario 2: Low Cost and Schedule Growth
-$4,000
-$3,000
-$2,000
-$1,000
$0
$1,000
$2,000
$3,000
$4,000
$5,000
2011 2012 2013 2014 2015 2016 2017 2018
Cash
Flo
w ($
Milli
on)
Year
$3,507 M $3,627 M $3,747 M $3,867 M $3,987 M
-$1,890 M -$1,980 M -$2,071 M -$2,162 M -$2,251 M
NPVTarget= $7.6 Billion NPVScenario 2= $6.8 Billion11.1% Loss of NPV
To-Be Cash Flow
-$4,000
-$3,000
-$2,000
-$1,000
$0
$1,000
$2,000
$3,000
$4,000
$5,000
2011 2012 2013 2014 2015 2016 2017 2018
Cash
Flo
w ($
Milli
on)
Year
$4,017 M $4,155 M $4,292 M $4,430 M $4,567 M
-$2,165 M -$2,268 M -$2,372 M -$2,476 M -$2,579 M
As-Is Cash Flow
Project Cost Growth
Owner (NTotal=975)
-10% 10%
10%
-10%
-3.0% 3.0%
2.7%
-2.7%
Project Schedule Growth
Net Present Value (Forecast for 2012-2016)
NPV = $ 6.4 Billion NPV = $ 5.7 Billion
NPV = $ 6.6 BillionNPV = $ 6.8 Billion
NPV = $ 7.7 BillionTarget
Expected NPV = $ 6.5 Billion
NPV Impact of Suggested P.M. Practices
• Best Strategy to Maximize Expected NPV– Lump Sum Contract, Working with CII Contractor, PDRI<=200, and High
Use of Planning for Startup
– Expected NPV can increase $496 Million– Expected NPV can decrease $2,113 Million
Practices Expected NPV Gain/Loss Improvement
CII Owners’ Average $ 6.45 Billion N/A N/A
Contract MethodLump Sum $ 6.81 Billion $ 360 Million 5.5%
Cost Reimbursable $ 5.50 Billion - $ 950 Million -14.8%
Working RelationshipWork w/ CII Contractor $ 6.80 Billion $ 350 Million 5.3%
Work w/ Non-CII Contractor $ 4.61 Billion - $ 1,840 Million -28.5%
PDRI<=200 $ 6.48 Billion $30 Million 0.5%
>200 $ 6.10 Billion - $360 Million -5.6%
Planning for StartupHigh Use $ 6.45 Billion $ 0 Million 0.0%
Low Use $ 6.23 Billion - $220 Million -3.4%
496$)0($)30($)350($)360($ 2222 Million
Opportunity Exists To Improve
Target NPV
Expected NPV
B.P. Enhanced NPV
Optimal NPV
$7.65 B
$6.45 B
$6.95 B
$8.00 B
KNOWN
UNKNOWN(RESEARCH)
PROJECT PHASE PERFORMANCE RESEARCH(IMPACT ON SCHEDULE)
CII Phase Duration Research (2011-Present)
• Normalized $250 MM Projects• C/R (Blue) vs. L/S (Red) Contracting
Procurement Involvement in FEP
35 Weeks
40 Weeks
Arrangement of Phases
Stop Mean
StartMean
LEGEND
PHASE
Stop Mean
StartMean
Duration in %Duration in %
Heavy Light
0.00% 0.31% 0.32% 0.55% 0.72% 0.96%0.92% 0.99%Heavy Light
0.78%0.00% 0.23%
0.24%0.26% 0.40% 0.56% 0.72% 0.78% 0.92% 0.99%
Overall Duration
Phase
Heavy (D=0.32%)Light (D=0.24%)
Front‐End Planning
Design/Engineering
Procurement
Construction
Start‐UP
Heavy (D=0.41%)Light (D=0.34%)
Heavy (D=0.45%)Light (D=0.46%)
Heavy (D=0.41%)Light (D=0.52%)
Heavy (D=0.07%)Light (D=0.21%)
Engineering Phase
• Impact of Design Efficiency
74% p=0.063
5 Principles of Project Integration
• Work and Work Process• Organizational Engineering• Leadership and Governance• Communications and Information Flow• Business Environment and Culture
Communication and Information Flow
• Communicate Too Much or Not Enough?• Lines of Communication = (n(n-1))/2
# Project Team Members # Lines of Communication7 2115 10550 1225100 4950500 124750
Interface Mgmt. vs. Project Cost Growth
Mean: 0.18Standard Deviation: 0.38
Mean: 0.04Standard Deviation: 0.16
Formal IM (n=10)Informal IM (n=27)
p=0.25
Cos
t Gro
wth
• Formal IM projects had lower mean of cost growth and less standard deviation
Advanced Work Packaging?
Advanced Work Packaging?
Program(me) Management• The coordinated management of a portfolio of projects to
achieve a set of business objectives (CCTA 1995)
BusinessStrategy
CorporatePlanning
ProgramManagement
ProjectManagement
RiskMitigation
ChangeManagement
Change Management
Progress Reports
ProgramDefinitionPackage
ImplementablePrograms
Strategy Alignment
Economic/Risk ModelImplementable Programs
IT StrategyPlanning Policies
Political ConsiderationsCompliance Statements
Company Planning ObjectivesOther External Risk Factors
Program ConsiderationsCorporate Guidelines
Implementable ProjectsProgress Reports
Project Planning
AssetDevelopment
Process
Program ObjectivesRisk Model
Risk ModelProject Definition Package
ChangeManagement
PlansProgram
Objectives
BusinessStrategy
CorporatePlanning
ProgramManagement
ProjectManagement
RiskMitigation
ChangeManagement
Change Management
Progress Reports
ProgramDefinitionPackage
ImplementablePrograms
Strategy Alignment
Economic/Risk ModelImplementable Programs
IT StrategyPlanning Policies
Political ConsiderationsCompliance Statements
Company Planning ObjectivesOther External Risk Factors
Program ConsiderationsCorporate Guidelines
Implementable ProjectsProgress Reports
Project Planning
AssetDevelopment
Process
Program ObjectivesRisk Model
Risk ModelProject Definition Package
ChangeManagement
PlansProgram
Objectives
Programmatic Change Management• Change Management System
– Wal-Mart makes 170 changes per month to Supercenter prototype
Advanced Work Packaging!
© 2001; Boeing Corporation (DCAC/MRM Initiative)
Questions?
Stephen P. Mulva, Ph.D.Associate Director, [email protected]+1.512.232.3013