Presentation is loading. Please wait.

Presentation is loading. Please wait.

The Capital Projects World in 2009 Let’s Use the Lull Wisely Business Presented to the Houston Roundtable January, 2010 Ed Merrow.

Similar presentations

Presentation on theme: "The Capital Projects World in 2009 Let’s Use the Lull Wisely Business Presented to the Houston Roundtable January, 2010 Ed Merrow."— Presentation transcript:

1 The Capital Projects World in 2009 Let’s Use the Lull Wisely Business Presented to the Houston Roundtable January, 2010 Ed Merrow

2 CONFIDENTIAL - IBC 2009 2 Questions to Ponder Where have we been? What have we learned? Where do we go from here?

3 CONFIDENTIAL - IBC 2009 3 A Look at Where We Have Been The 5 years ending in the 2nd Quarter of 2009 were the largest binge of capital spending in the collective process industries in history Having finally adjusted to the feast, we are now asked to adjust to the famine Capital excellence suffered some substantial damage in the boom, but we held our own as a community Timely adjustment to the bust will be even more important because many of the core problems remain

4 CONFIDENTIAL - IBC 2009 4 The Damage Done in the Boom The hyperinflation in capital projects represents a huge loss of productivity because escalation in projects far outpaced general inflation Projects executed in overheated labor-short environments suffered grievous harm more often Generally, the larger the project, the more severely it was hurt by poor practices The key problem was poor control –Inadequate owner cost estimating skills –Poor field controls –Weak construction management The contracting industry is still a mess

5 CONFIDENTIAL - IBC 2009 5 After years of steady improvement, some of the key leading indicators of performance have stagnated or even turned down –Front-End Loading (FEL) –Use of the Value Improving Practices (VIPs) Controls is the only area showing any real improvement, and that was from a very poor base Practices Have Suffered

6 CONFIDENTIAL - IBC 2009 6 Front-End Loading Suffered POOR FAIR GOOD BEST Completed Projects >$10 Million

7 CONFIDENTIAL - IBC 2009 7 The Progress Made in the Boom We got their attention! –The severe shortages of in-house engineering and project management competencies was a great shock to most businesses –Not everything could be done when they wanted it –Out of control projects made the weaknesses in the project systems painfully obvious in most cases We were able to build some competencies in some cases –The virtues of owner estimating became apparent –The need for planner/schedulers and controls personnel became palatable again

8 CONFIDENTIAL - IBC 2009 8 The Progress We Didn’t Make in the Boom We only barely started to address the demographic mess created over the last 20 years Although we got permission to hire—and that did help—we were not always able to hire well And we did woefully little orientation, training, and skills development amongst those we did hire Not much innovation occurred in the projects world, nor I do expect a great deal in the next few years While I believe the integration between business and projects improved, it has a long way to go before it becomes healthy Owner/contractor relationships improved not at all

9 CONFIDENTIAL - IBC 2009 9 Questions to Ponder Where have we been? What have we learned? Where do we go from here?

10 CONFIDENTIAL - IBC 2009 10 What Learnings Accrue From the Boom? Most companies—never all—learned: –We really are in the project management business –We really are in the engineering business –What owner people do really is not the same as what contractor people do We learned that regaining lost competencies is discouragingly difficult In some cases, businesses learned that a runaway projects environment can be a business killer We learned that contractors are faster adapters to market realities than owners

11 CONFIDENTIAL - IBC 2009 11 Questions to Ponder Where have we been? What have we learned? Where do we go from here?

12 CONFIDENTIAL - IBC 2009 12 Get Recalibrated to the Market Quickly Even though we are beginning the worst global slump since the 1930s, project input prices will not likely collapse, at least in the short term Each set of inputs markets needs to be examined separately: –Engineered equipment –Bulk materials –Craft labor –Contractor engineering and project management services

13 CONFIDENTIAL - IBC 2009 13 Engineered Equipment Equipment vendors raised prices sharply over past 5 years But they did not increase capacity very much, and very few new players were added Rather, vendors added work shifts; in some cases worked 24/7 to exploit the boom Vendors are cutting shifts and overtime rather than prices The equipment market actually peaked in December 2007 for longest lead-time items Prices will only come down significantly if recession is long and deep (as is widely expected) When equipment prices fall, they are likely to fall like a stone Early lock-in of equipment is probably a very bad idea now

14 INDEPENDENT PROJECT ANALYSIS CONFIDENTIAL 14 Major Equipment Escalation Mechanical Equipment Equipment data primarily include mechanical equipment (Examples: compressors, fans, blowers, and pumps). Cost escalation trends are displayed in US dollars. 14 Global Trend from January 2003 (Jan. 2003 = 1.00)

15 INDEPENDENT PROJECT ANALYSIS CONFIDENTIAL 15 Major Equipment Escalation Typical Project Mix of Equipment Cost escalation trends are displayed in US dollars. 15 Equipment data include a diverse mix of fabricated and mechanical equipment with some E&I. Global Trend from January 2003 (Jan. 2003 = 1.00)

16 CONFIDENTIAL - IBC 2009 16 Bulk Material Prices Will Fall Faster Simple bulks, such as concrete and carbon steel, will be first to fall Materials with more engineering and labor, such as fabricated pipes and standard valves, have stabilized and will fall in coming months as current demand works through High-alloy materials costs will stay up longer but will very likely fall by mid-year in most cases

17 INDEPENDENT PROJECT ANALYSIS CONFIDENTIAL 17 Bulk Materials Escalation Mix of Trades Bulk Materials data include 50 percent piping and steel and 50 percent measurement instruments (Examples: metal valves, wiring devices, concrete, and insulation materials). Cost escalation trends are displayed in US dollars. 17 Global Trend from January 2003 (Jan. 2003 = 1.00)

18 INDEPENDENT PROJECT ANALYSIS CONFIDENTIAL 18 IPA Process Plant Escalation Index Escalation Comparison Cost escalation trends are displayed in US dollars. Data are a composite escalation index for various types of projects. 18 Global Trend from January 2003 (Jan. 2003 = 1.00)

19 CONFIDENTIAL - IBC 2009 19 Construction Labor Cost and Productivity Effective labor rates will only fall appreciably in the former hot spots Effective labor rates are coming down now as overtime, traveler allowances, and other adders are being removed The most serious problem with labor costs, however, has been erosion of labor productivity caused by poor owner and contractor management The productivity problem is not guaranteed to disappear completely as the market cools—big opportunities here for the smart owner

20 INDEPENDENT PROJECT ANALYSIS CONFIDENTIAL 20 20 Labor Escalation Comparison Global Trend from January 2003 (Jan. 2003 = 1.00) Cost escalation trends are displayed in local currency.

21 CONFIDENTIAL - IBC 2009 21 Engineering/Project Services Are the Big Unknown Cost of global engineering services is up sharply since 2003 Contractor fees are much higher on reimbursable work, and risk premiums are much higher on hard money work Engineering productivity has declined sharply in the past 2 years in most parts of the world after a very long period of improving productivity

22 CONFIDENTIAL - IBC 2009 22 Engineering and Project Services Contractor capacity has not increased, and the demographics are very poor in OECD* even for sustaining current capacity Contractor market remains consolidated and will consolidate further in the downturn Medium and small projects will see relief the fastest; that market is inherently more competitive; we noted the softening in this market at IBC 2008 Very large projects may never see a large downturn in engineering costs unless the recession is dreadful *Organisation for Economic Cooperation and Development

23 INDEPENDENT PROJECT ANALYSIS CONFIDENTIAL 23 23 Cost escalation trends are displayed in US dollars. Engineering Price Index Global Trend from January 2003 (Jan. 2003 = 1.00)

24 CONFIDENTIAL - IBC 2009 24 Restore Lost Productivity Get the conservatism, the escalation, and the hidden contingency out of estimates immediately Once again become very cost conscious, remembering that the best and only durable means of cost-savings are sound practices Schedule is generally much less important today than 6 months ago—even for turnarounds! We need to monitor and supervise contractors more closely now than even in the boom, as the need and desire to crank hours will increase again We need to reevaluate contracting strategies without simply reverting to the bad old days of abusing the contractors Contractor claims will again be very important; keep improving controls and construction management Sadly, plan for further cuts by improving project portfolio management both at the center and the plants

25 CONFIDENTIAL - IBC 2009 25 Build Capability in the Downturn Over the past 5 years, hiring competent project people has been extremely difficult The downturn will inevitably put some very competent people in the job market; it already has If you have skill areas that need bolstering, smart companies will seize staffing opportunities during this time Highly skilled professionals will be leaving at a rapid rate to retirement over the next few years Time is of the essence

26 CONFIDENTIAL - IBC 2009 26 Use the Time to Train and Educate Now is the time to bring the staff hired over the past 5 years fully into your organizations Training on the contracting process and environment is essential and it is essential that it happen quickly Finally, educate your businesses once again around basics: –What is the role of the gated process in the governance of capital? –Why is the FEL 2 gate (end of Scope Development) so important? –How can we improve the business/engineering interface?

27 CONFIDENTIAL - IBC 2009 27 Enjoy IBC 2009 And build for the Future

Download ppt "The Capital Projects World in 2009 Let’s Use the Lull Wisely Business Presented to the Houston Roundtable January, 2010 Ed Merrow."

Similar presentations

Ads by Google