IPA Institute Capital Projects Webinar Series:

The Seven Deadly Sins in Industrial Megaprojects

Andrew F. Griffith, Director of the IPA Institute

Independent Project Analysis, Inc.

Project management research and consulting company
Our mission: Improve the competitiveness of our
customers through enabling more
effective use of capital in their businesses
Todays talk draws from: Industrial Megaprojects:
Concepts, Strategies, and Practices for Success by
Edward W. Merrow

The IPA Institute - a Division of IPA, Inc.

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Our Vantage Point on the Industry

IPA evaluates industrial projects, large and small,
around the world
Are the projects ready to proceed to the next phase?

Are the projects set up to succeed (or fail)?

At the end, did the projects accomplish their goals?

In a typical year, 600-700 new projects are added to our

databases
About 10 percent of these projects fall into the very
large categoryover $1 billion in capital

The IPA Institute - a Division of IPA, Inc.

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IPA Proprietary Databases

PROCESS PLANTS PES
14,000+ projects
Detailed histories of process
plant projects >$6MM

Life Sciences and Nutrition

900+ projects
Agri-Nutrition-Food
Pharma-Health
Consumer Products

PES SMALL PROJECTS

6,000+ projects
Projects <$6MM from
process industries

INFORMATION TECHNOLOGY
300+ projects; including
Applications Development,
Telecommunication, etc.

HAZRISK
400+ projects
Environmental assessments and
cleanups

INSTRUMENTATION & CONTROL

120+ projects
Automation, DCS, SCADA, etc.

MEGAPROJECTS
300+ projects
$Billion class projects, all types

UPSTREAM PES
1,000+ projects
Petroleum production
platform worldwide

POWER PLANTS
150 projects
Single or combined cycle plants

PIPELINES
800+ projects
Pipelines, terminals, booster stations, etc.

The IPA Institute - a Division of IPA, Inc.

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Industrial Megaprojects
Megaprojects executed by the petroleum, minerals,
chemicals, and power industries are now shaping the
economic landscape around the world
Easily accessed mineral resources have largely been
depleted
Oil companies must venture into deep water and
difficult environments
Chemical companies seeking low-cost feedstocks or
fast-growing markets must exploit economies of scale
to compete

Extensive infrastructure development requires projects

to be large enough to spread the costs over a wide
base
The IPA Institute - a Division of IPA, Inc.

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225

200
(Escalation Removed)

Annual Spend in Billions of Dollars

Industrial Megaproject Activity

175
150
125

100

Over-Heated
Market Growth
Rate
~24%

Project
Market
Growth Rate
Even Faster

75
50
25
0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

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Geographical Distribution of Megaprojects

Evaluated
Central Asia
4%

Europe
15%

Canada
7%

Asia
9%
United States
13%
South America
19%

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Africa
9%
Middle East
15%
7

Australia
9%
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The Key Issues

Projects are getting larger and more complex
everywhere in the world
As we will see, large projects are failing much too
often
Do large projects fail more often simply because they
are more difficultor

Do we alter our practices?

What do we need to do differently going forward?

The IPA Institute - a Division of IPA, Inc.

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Defining Success and Failure

We deem a project to be a failure if
one or more of the following occurred:

Failure Rate
100%

Costs grew (Real)

25% +

90%

Execution Schedule Slipped

25% +

80%

Cost Competitiveness (Absolute Measure) 25% +

70%

Megaprojects
60%

Severe and Continuing

Operational Problems for 2
Years or more after startup

Yes

50%
40%
30%

About two-thirds of large projects

failed by these criteriatwice the rate
of smaller projects

Projects
<$500 MM

20%
10%
0%

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Megaprojects Split Into Radically Different

Groups
COST INDEX (competitiveness)
1.3

Failed Projects
(65 percent)

1.2

Successful Projects
(35 percent)

1.1

COST GROWTH

PRODUCTION
SUCCESS
40%
30%

1.0
20% 10%
0%

60%
100%

40%

80%

0%

10%

20%

30%

EXECUTION
SCHEDULE INDEX

EXECUTION
SCHEDULE SLIP

(Competitiveness)
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Seven Deadly Mistakes in Industrial Megaprojects

1. I want to keep it all!
2. I want it yesterday!
3. Well just work out the details of the deal later
4. Why do you want to spend so much up-front?
5. Lets cut that cost estimate down!
6. Let contractors carry the risk; theyre doing the project!
7. Fire those #@/*$ project managers who overrun our
projects!
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1. I Want to Keep it All!

Megaprojects affect many more people than just the
investors
All those affected by the project will want input on
how:
The project is organized and executed
The value of the project is allocated

If these stakeholdersclaimants on project valueare

not satisfied that the allocation is fair, they disrupt the
project and render it unmanageable
Disruption kills megaprojects because they are
inherently fragile; when they break, they tend to
shatter
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2. I Want it Yesterday!
The drive for speed, results in the projects outrunning:
Basic technical data development
Stakeholder alignment
Permitting requirements
Front-end loading development
Even the business deal

Large projects are complex and tightly inter-connected

They cannot recover from cut-corners

There are no work-around strategies that actually work

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Speed Kills

Less

Dimensions of High cost growth (25%+) Severe schedule slip (25%+)

Failure:
Large overspend (25%+) Production Failure (first two years)
+1 std. dev.

1.40

MEAN
-1 std. dev.

1.20
1.00
0.80

More

0.60
0.40
Successful Project

Number of Dimensions In Which A Project Failed

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The ABCs of Megaproject Failure

Antecedent

Behaviors
Incomplete or
Incorrect Basic Data

Consequences
+33% Cost
Growth

Aggressive

Poorer Front-End
Loading

+37% Less Cost

Effective

Schedule

Project Is Harder to
Staff

+30% Schedule

Higher Project
Leader Turnover
Team Is Not
Integrated
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48 Percent of
Planned
Production
achieved 17
months after
promised date
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3. Well Work Out the Deal Later

The contours of the business deal must be worked out
before developing the project scope
Exactly how are we going to generate a large enough
revenue stream?
How is the cost/tax regime of the resource going to be
adjusted to fit the economic realities?
How will downside risks be allocated?
How will any upside be divided?

The deal must shape the project; the project cannot

shape the deal!

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4. Why Do You Want to Load-up the

Front-End?
The front-end of projectsbefore we authorize them
is the time for defining the scope and planning the
execution in detail
What is done (and not done) on the front-end has more
bearing on megaproject outcomes than anything else
But its expensive3 to 5 percent of eventual total
costand people are often cheap in the name of being
frugal
Loading up the front-end is the best possible
investment
Best

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Good

Fair

17

Poor

Inadequate

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FEL is Most Important for Megaprojects

Effect of FEL on Cost

Competitiveness

40%

Megaprojects

Note that FEL is also crucial

for even largish projects

30%

250 - 500

20%
100 - 250
<100MM

10%

0%

Best Practical

Best

Good
Good

Fair
Fair

Poor
Poor

Screening
Inadequate

FEL Index

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FEL Drives Cost Predictability

100%
Pr > |t| < 0.0001

Cost Deviation

80%
60%
40%
20%
0%
-20%
-40%

Best

Good

Fair

Poor

Inadequate

FEL Index
Shading represents 1 standard deviation
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FEL Drives Schedule Predictability

Execution Schedule Slip

100%
80%

A poorly front-end loaded megaproject is

likely to be 26 months late to completion!

60%
40%
20%

0%
-20%
Pr > |t| < 0.001

-40%

Best

Good

Fair

Poor

Inadequate

FEL Index
Shading represents 1 standard deviation
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FEL Reduces Operability Problems

Failure to produce at or close to the rate promised at authorization
is debilitating to the economics of the project!
80%

Percent of Projects That

Were Operability Failures

Pr > |X2| < 0.001

60%

40%

20%

0%

Best

Good

Fair

Poor

Inadequate

FEL Index
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Injury and Accident Rate per

200K Field Hours

Execution Planning Improves Safety

1.20
Recordable Incident Rate

1.00

DART Incident Rate

0.80
0.60

0.40
0.20
0.00

Definitive
Definitive

Preliminary
Preliminary

Assumed
Assumed

Project Execution Planning

Data are restricted to countries with strong reporting standards
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How Well Are Megaprojects Defined at

Authorization?

Percentage of Projects

70%
60%
50%
40%
30%
20%
10%
0%

Best

Good

Fair

Poor

Inadequate

FEL Index

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What Difference Does it Make?

Percent in Group

Percent Successful in Group

Percentage of Projects

70%
60%
50%
40%

30%
20%
10%
0%
Best

Good

Fair

Poor

Inadequate

FEL Index

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5. Lets Get that Estimate Down!

A good many megaprojects die when the first full cost
estimate is preparedand thats a good thing!
What is not good is when the business response to an
estimate that is higher than the budget is sharpen
your pencils!
Cost estimates are a reflection of:
The scope of the project that you want to do
The circumstances in which you must do the project

Nearly 20 percent of the megaprojects in our database

attempted a cost-reduction exercise just before or
just after authorization
Every last project failed
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6. The Contractors Should Carry the Risk!

We often attempt to transfer cost risk to contractors in
the form of lump-sum (fixed price) contracting; well
put a ceiling on the cost!
In megaprojects, risk transfer rarely actually occurs
and even when it does, it is necessarily economically
inefficient
Contractors are non-capitalized, variable-cost firms
They have very limited ability to carry large equity-type
risks and price risk very aggressively when they are
forced to carry it

That is not gouging; it is plain common sense

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7. Lets Hold the Wrong Folks Accountable!

The high failure rate in megaprojects is the result of an
accountability problem
But those actually responsible for the failures are
almost never those actually blamed
Of the 207 failed industrial megaprojects that IPA
reviewed, project management was actually culpable in
less than 10 of the cases
Overwhelmingly, the source of failure can be found
within the business promoting the project
The search for scapegoats should always start with the
morning mirror

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Seven
Key Virtues
in Industrial
Seven Deadly
Mistakes
in Industrial
Megaprojects

Megaprojects
1. I want to keep it all!

2. I want it yesterday!
3. Well just work out the details of the deal later.
4. Why do you want to spend so much up-front?
5. Lets cut that cost estimate down!
6. Let contractors the risk; theyre doing the project!

7. If the project manager overruns, fire the bum!

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Seven Key Virtues in Industrial

Megaprojects
1. I want to allocate the value fairly and stabilize the project
2. I want it on a schedule that will permit success, no faster
3. The deal will precede and shape the scope
4. We will follow best practice in front-end definition
5. The only way it can cost less is if I want less
6. It is our project. We carry the risk
7. Accountability and responsibility start at home

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Thank You!
Andrew F. Griffith, Director, IPA Institute
Independent Project Analysis, Inc.
+1 (703) 726-5375
agriffith@ipaglobal.com

www.IPAInstitute.com

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IPA Institute Capital Projects Webinar Series:

The Seven Deadly Sins in Industrial Megaprojects
Andrew F. Griffith, Director of the IPA Institute