Advances in benchmarking capital
project costs
A scope based approach to benchmarking project costs can provide insights
to improve competitiveness
SHAWN HANSEN
Asset Performance Networks
E
ffective execution of cap-
ital projects is essential
to the financial health of
refining, chemical, energy,
and midstream companies.
Unfortunately, engineering and
construction project perfor-
mance has stagnated over the
past decade. Reports of multi-
billion dollar projects over-run-
ning by hundreds of millions
of dollars are common and
almost unnewsworthy. Some
industry owners and opera-
tors have responded to disap-
pointing project performance
by implementing more elab-
orate project assurance prac-
tices. But in most cases, the
changes have not provided the
intended benefits. The upshot
has been more arthritic and
bureaucratic processes, while
the industry demands more
nimble and competitive strat-
egies. Meanwhile, project
benchmarking practices have
stagnated with project perfor-
mance. Faced with increasing
challenges and increasingly
ineffective tools, owners and
operators have found them-
selves ill equipped to affect
tangible change in project per-
formance. To deliver better
www.digitalrefining.com/article/1001453
project outcomes, owners and
operators need to gain a better
understanding of project risk
and competitiveness. To that
effect, they need better bench-
marking tools.
Project predictability and
productivity are falling
Data collected by Asset
Performance Networks
(AP-Networks) provides an
understanding of current pro-
ject performance and challenges.
The AP-Networks Capital
Project Database contains infor-
mation on approximately 2000
capital projects authorised after
2005. More than 900 of these are
major projects, with costs rang-
ing from $25 million to more
than $3 billion. The major pro-
ject database comprises infor-
mation from refining, chemicals,
energy, midstream, and power
generation projects, with data
provided by more than 30 refin-
ing and chemical companies.
Revamp, debottleneck, brown-
field, and greenfield projects are
all represented.
This data demonstrates that
capital project costs and sched-
ules have remained unpre-
dictable for the past decade.
Seventy-two percent of pro-
jects fail to achieve their
cost, schedule, or safety tar-
gets. Approximately 25%
of projects can be dubbed
‘train wrecks’, over-
running their cost estimates
or schedule targets by more
than 25%, or suffering signifi-
cant issues and delays during
start-up.
Many factors contribute to
project failure. Project charac-
teristics associated with com-
plexity and risk – including
size, number of stakeholders,
technical complexity, and level
of integration with existing
assets – continue to increase.
One factor worth emphasis-
ing is labour productivity.
Engineering and construction
productivity are key to cost
competitiveness and under-
standing risks. Our analysis
shows that over the past dec-
ade, engineering and construc-
tion productivity has been
poor. Figure 1 shows the change
in construction labour produc-
tivity of refinery projects rela-
tive to other industries.
Based on data from the US
Bureau of Labor Statistics
(BLS), construction labour pro-
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 5
Average annual increase in
productivity since 2007, %
4 Lang Factors
3
2
1
0 should seek to answer the fol-
Overall
(non-farm)
economy
Figure 1 Labour productivity
ductivity for the overall US
economy in the last decade
has improved at more than 1%
annually. AP-Networks’ data
and analysis show that con-
struction labour productiv-
ity in the refining industry has
remained flat over this same
period. The BLS reports that
auto manufacturing productiv-
ity has improved nearly 2% per
year, leading to cost reductions
of about 16% over the decade.
Even accountants and lawyers
have made more productivity
Total cost
Figure 2 Benchmark relationship between equipment cost and total cost
2 Revamps 2017
Auto Accountants Refinery
manufacturing and lawyers projects
improvements than the projects
in the refinery industry.
A recent article concluded
that some construction indus-
try practices and structural
problems increase costs for
buyers, but hamper invest-
ment in improving productiv-
ity.1 As other industry sectors
improve, the world of projects
languishes. Indeed, the pro-
jects sector lacks effective tools
to understand and benchmark
engineering and construction
productivity.
Lang Factor
+150%
−40%
Amount of equipment
Commonly used Lang Factors
Process type Range of typical
Solid process plant 3.10-3.89
Solid-fluid process plant 3.63-5.04
Fluid process plant 4.47-6.21
Table 1
The limits of current project
benchmarking tools
Before funding and executing a
major capital project, an owner
lowing questions:
1. How much risk are we tak-
ing on? Is it more than we can
handle?
2. Is the project cost estimate
too aggressive?
3. Are we spending too much
to modernise this plant or add
capacity?
4. Is the project cost estimate
too conservative?
5. Will this project add to or
detract from our competitive
position in the industry?
Armed with cost benchmarks
to compare their own plans to
industry norms, firms look to
answer these vital questions.
Engineering and construction
activities make up between
70% and 85% of a typical pro-
ject’s costs, with the remainder
being equipment and materi-
als (pipe, steel, concrete and so
on). At AP-Networks, our con-
versations with industry lead-
ers have revealed shortcomings
with current cost benchmarking
methods; benchmarking efforts
do not provide the actionable
insights that are necessary to
affect change.
The traditional approach to
benchmarking capital cost is
derived from a method known
as Lang Factor Analysis.
Developed as an estimating tool
seven decades ago, the Lang
www.digitalrefining.com/article/1001453
Factor is the ratio of the total
project cost to total equipment
cost.2 Lang Factors can be found
for various types of plants (see
Table 1). Project teams and
estimators make adjustments
for escalation, location and
size, and then compare indus-
try Lang Factors to their pro-
ject estimates and actual costs
in order to benchmark perfor-
mance. The results are inter-
preted as follows: higher Lang
Factors represent a conservative
estimate or an overly expensive
actual cost, while lower Lang
Factors represent a more com-
petitive (and riskier) estimate or
competitive actual costs.
Lang Factor analysis is based
on the assumption that equip-
ment costs fully describe a pro-
ject’s scope and can be used to
factor up to total capital costs.
Statistics show that, in general,
as more equipment is installed,
total costs increase. However,
as Figure 2 shows, there is a
large degree of variability in the
equipment to total cost relation-
ship. Indeed, that variability is
more than 100%.
This traditional approach to
project cost benchmarking often
provides results that are diffi-
cult to decipher. Is my project’s
cost high because of inefficient
engineering, or is the amount
of engineering needed appro-
priate because of the amount of
piping that must be designed?
The Lang Factor method
and its variants do not pro-
vide insight into such issues.
Overall, these benchmarks do
not provide adequate spec-
ificity to help project teams
improve performance and
deliver successful outcomes.
The conclusion is clear: equip-
ment costs alone do not fully
explain total project costs.
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Direct labour hours
Range
±15%
Scope
Scope is measured as the amount of
equipment, concrete, steel, electrical and
instrumentation quantities to be installed.
Figure 3 Advanced Benchmarking Methodology: full inclusion of scope factors
and focus on labour hours improves model credibility
A modern approach to capital • Fully accounts for project
project benchmarking scope by considering the mix
To address this issue, of material being installed (see
AP-Networks launched an Figure 3)
extensive research effort aimed • Focuses on indirect and
at developing a new approach direct labour, thereby pro-
to capital project benchmark- viding actionable insights to
ing. Our research has cul- management
minated in the Advanced • Provides transparent com-
Benchmarking Methodology parison of your project to other
(ABM), a scope based approach projects with similar scope
to project benchmarking that • Uses advanced statistical
focuses on productivity meas- methods to improve bench-
ures and is now in use by lead- mark accuracy
ing industry companies. • Can be applied to a wide
Our research shows that pro- variety of projects, including
ject cost is primarily dependent revamps.
on two factors: ABM provides a clear under-
• The amount and types of standing of how construc-
materials installed tion labour productivity for
• The productivity of direct and specific construction disci-
indirect project labour. plines, as well as project indi-
ABM uses the amount of rects, contributes to total project
equipment, piping, steel, con- costs. This information helps
crete, electrical and instru- project teams understand spe-
mentation being installed cific project risk areas and gauge
to benchmark the required project cost relative to industry
amount and productivity of peers. With these insights, firms
indirect and direct labour. This can finally tailor their efforts to
scope based approach offers affect change and achieve tangi-
distinct advantages over tradi- ble gains in project predictability
tional project benchmarking: and competitiveness.
Revamps 2017 3
 Refinery revamp project materials

Material Quantities
Equipment 70 pieces
Concrete 175 cubic yards
Indirect hours Steel 220 tons
Hours

Pipe 75 500 linear ft

Direct hours
(average diameter 5.7in)
Other Electrical 48 500 ft
Instrumentation Instruments 500 items
Electrical
Concrete
Steel Table 2
Piping
Total hours Hours Total hours Hours Case study
(direct + indirect) distribution (direct + indirect) distribution
An $80 million refinery revamp
Benchmark Project estimate
project installed the materials
listed in Table 2. The quanti-
Figure 4 Refinery revamp project direct labour hour benchmarks illustration ties in Table 2 provide the basis
for benchmarking construction
labour and project indirects;
they are the key input factors
Hours or independent variables in the
distribution
Hours ABM regression models. We
Other
CM
distribution use this quantity information in
Labour hours

Other
PMT
CM
our ABM to generate construc-
Home
office PMT tion labour hour and project
Home indirect hour benchmarks.
office
Figure 4 illustrates the disci-
pline level metrics that result
Indirect hours from the ABM and their com-
Direct hours parison to the project. In this
Total hours Total hours case, the estimated piping
(direct + indirect) (direct + indirect) hours appear to be substantially
Benchmark Project estimate less than the industry norm.
The project has either struck an
Figure 5 Refinery revamp project indirect hour benchmarks illustration estimate that is too aggressive,
or has plans to achieve much
better piping labour produc-
tivity than its industry peers.
Other
Figure 5 shows the benchmarks
Contingency
Indirect
for the refinery revamp project
Direct indirect hours.
As Figure 6 illustrates, ABM
Output, $M

Bulk materials
Equipment also uses the resulting project
hour benchmarks to bench-
mark the total project cost rel-
ative to industry. Figure 6
shows that the estimated pro-
ject direct labour costs are low.
The aggressiveness of the esti-
Benchmark Project estimate mated piping labour hours (see
Figure 4) is a key driver of the
Figure 6 Project cost benchmarks illustration overly aggressive direct field

4 Revamps 2017 www.digitalrefining.com/article/1001453

labour cost target. Figure 6 also
shows that the total project cost
and the project indirect costs
are aggressive. The contingency
assigned is not adequate.
Figure 7 provides an illus-
tration of the summary results
for the ABM for the refinery
revamp project. The cost target
is aggressive for the materials
that the project is engineering
and constructing. This can
be attributed primarily to the
aggressive piping labour pro-
ductivity target. The engineer-
ing and construction schedule
is reasonable for the quantities,
but is at risk because the pip-
ing labour hours are aggressive.
The ABM spotlights the areas
of risk, thereby providing man-
agement with a guide on where
to focus their efforts. Lang
Factor methods would not have
targeted the piping risks. This
example project overran cost by
30%. Piping field labour hours
grew substantially, causing the
project to become longer and
project indirect costs to over-
run. There was inadequate con-
tingency to cover the overrun.
Conclusions
Setting the right targets is crit-
ical to achieving project suc-
cess in the current highly
competitive environment.
The scope based benchmark-
ing provided by the Advanced
Benchmarking Methodology
can provide actionable insights
and identify the levers that can
be used to improve a project’s
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Top quartile
Second quartile
Third quartile
Bottom quartile
Revamp project
Industry average
Engineering
and
construction
Cost,
$MM
Figure 7 Summary of benchmarks for refinery revamp case study
competitive position. With this
advanced scope-based bench-
marking, owners gain cred-
ible and reliable project cost
and schedule benchmarks that
fully address project scope, and
account for the amount of pip-
ing and mix of other materials.
This new scope based pro-
ject benchmarking can cover
a wide range of projects from
greenfield to revamp that are
particularly problematic for
traditional cost ratio analyses.
The benchmarks provided by
the Advanced Benchmarking
Methodology are transpar-
ent; they are related directly
to the project quantities. The
transparency of the bench-
marks enables the clear iden-
tification of risk areas, and
empowers project teams to
take effective action to improve
project performance.
Execution Direct Total
duration field indirect
Schedule, Labour,
months h×1000
References
1 The Economist, The construction
industry, least improved, 18 Aug 2017.
2 Lang H J, Cost relationships in
preliminary cost estimation, Chemical
Engineering, Oct 1947.
Shawn Hansen is the Manager of
Capital Projects with AP-Networks. He
developed the Value and Competitiveness
Assessment of Plant-Based Projects
(VCAP), which helps companies improve
the business value of small projects. He
has completed empirically based cost,
schedule, and performance risk analyses
for more than 100 major capital projects,
helping to optimise project delivery and
pursue high return projects.
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