Operating system 2.o: Unlocking project value A Presentation to Project Norway, Trondheim, norway Stephen Mulva – Director, CII February 27, 2018

Industry advancement? 1963 50 Years Today’s projects are unsustainable (5.4% success rate) We can do much better (with a new operating system) 1963 2013 50 Years

Best practices = outdated? Processes or methods that, when executed effectively, lead to enhanced project performance. To qualify, a practice must be sufficiently proven through extensive industry use and/or validation. (Predictable, Consistent, and Inefficient) Advanced Work Packaging Alignment Benchmarking & Metrics Change Management Constructability Disputes Resolution Front End Planning Implementation of CII Research Lessons Learned Materials Management Quality Management Partnering Planning for Modularization Planning for Start-up Project Risk Assessment Team Building Zero Accidents Techniques

What we do is incredibly valuable Yet, the market doesn’t value us. Dow Jones Construction Index vs. DJIA (Feb. 2013 – Feb. 2018) -3.9% +70.5%

Finance isn’t for cavemen (the Problem) Seven Fortune 500 E&C companies (1.8% profit on $77B of revenue) 310% profits made on 40% of projects Extensive M&A to buy backlog (classic downward demand spiral) Living off “wrong side of the dollar” 90 day terms Inflationary spiral Owners view projects as too risky M&A, share repurchase E/C/F departments as profit centers

Outsiders in an industry with grocery-store margins June 16, 2017 Amazon acquires Whole Foods Are we next? June 16, 2017

The outsiders are here Elon Musk’s Hyperloop TBM 14x faster, 10x cheaper Ability to raise capital

Our industry: what’s hot and what’s Not Lean IPD (IFOA) Productivity Waste: 40% of cost is ‘transactional’ Owners’ project groups Outsourced to SBU’s Seen as ‘cost centers’ Innovative Strategic Solutions Provider Proactive & Responsive Reactive & Inefficient Owner Engineering/Construction/Facilities Maturity E/C/F Function Strategic Value C EE W M V GG BB J Z II E CC O N A B F D H K P Q R AA Y U T FF HH S G X I L DD

Innovate. Disrupt. Transform. Definitions 40% transactional cost Capital? Owners? Investment Banks Profit center mindset Leasing (Interface) CAPEX and OPEX Miniaturization Flatten the Supply Chain Stretch Each Dollar Shrink for Agility

Os 2.0 finance (Lease everything) Avoids immense amounts of capital (not a one-time event) Accumulation vs. borrowing (e.g., Ford Credit) Service provider equity in project financing Owning assets creates tax advantages (via depreciation) Products optimized for specific service durations Higher quality products (not just about first cost) New / different types of products

Because “plan the work, work the plan” doesn’t work Operating System 2.0 – A Construction Industry Manifesto   The leaders of the built environment recognize a need to revolutionize the way our industry delivers capital projects and programs to support financial and societal benefits. As the custodians of the infrastructure of modern society, we have a responsibility to achieve almost unimaginable improvements in cost, schedule, quality, and safety performance results to support the needs of our citizens. This can be done in way that is value creating as opposed to value subtracting. The choice is ours – to achieve these results in a way that creates value, or face value migration from external forces. To thrive in a dynamic and changing world, our industry must be adaptable, agile, and more responsive to the complex realities we face. We believe in the following declaration of beliefs and intentions: We will reduce the organizational layers and information gaps between the end user and those delivering the asset. We will deploy new financial vehicles to maximize financial and societal benefit. We will focus on the total cost of facility ownership. We will embrace true collaboration with better risk management that builds trust. We will value innovation, creativity, and inventiveness of people in order to meet the challenges in our built environment. We, the undersigned, firmly stand by this declaration of beliefs and intentions, and are committed to lead and bring about this change in our industry.

Operating system 2.0 opportunity Project Norway is a sponsoring organization Participating in OS2.0 as a volunteer Participating in OS2.0 as an (company) investor Cost: $0.50M or $0.25M/Yr. for 3 years (or more as desired) Intellectual Property (IP) rights Owner benefit: 35% lower cost, 50% cycle time reduction, 57% improved ROCE Provider benefit: 250% more volume, 300% improved profitability Operating System 2.0 Explained

Interest in Operating system For the industry ~$40M cap table “A level of energy and excitement not seen in decades”

(CII) Themes for the future Capacity building (workforce pipeline, learning organization, STEM) Process innovation (situationally-adaptable standardization) Technology-enabled transformation (data-centric, led by tech) Business model transformation (e.g., OS 2.0) Market analysis and production projections Social, environmental, and economic integration (lifecycle) Business drivers (financial and actuarial approaches) New forms of asset delivery (collaboration)

A new industry business model The capital projects industry is not economically viable for many sectors “Our (industry’s) house is on fire” -- Brendan Bechtel Stage Gate (OS1) is obsolete Sweeping change is required Open-system architecture (e.g., Android) Operating System 2.0 encompasses 7 transformational elements Financial and interface model To address productivity Through technology Industry 4.0 (manufacturing)

Operating system 2.0 workshops In what ways might business value be generated through capital programs?

Element 1 – (corporate) governance Enterprise, Program, Project (change, risk) Corporate (business strategy, long-range planning, capital budgeting, finance, commercial, legal, accounting, government relations, investor relations, tax, regulatory, and operations) CAPEX and OPEX (integration) R&D opportunities

Element 2 – commercial model Relational contracting (not roll-up) Industry compensation model Holonic projects / creative tension (reduction in transactional costs) Back office (accounting, risk management, payroll, etc.) Bundling (Kentucky)

First to biggest bundle wins (lean ipd+) Bigger Bundle = Bigger Economic Advantage A/E Firms, GC’s, Mechanical Trades, Licensors, Vendors Uncoordinated Pricing = Dynamic Instability For Component Sellers At 6 Components, 22% Price Reduction, 262% Profit Increase

Element 3 – design Miniaturization AND Modularization Preassemblies (mass customization) Design reuse and improvement Supplier-led design

Supplier-led design B787 Development Cost: From $10B to $6B (-40%) B787 Development Time: From 6 Years to 4 Years (-33%) Owner 50 Tier 1 Suppliers demands Engineering Engineering Fabrication PO’s Assembly HIGH Transaction Costs LOW Transaction Costs Construction Progression Fabrication Ecosystem supports Suppliers Owner

Miniaturization (Modularizaton and manufacturing) Full scale, mid-scale, small scale vs. AP 1000

Element 4 – production systems Management Science (agile, lean, project controls, estimating, etc.) Modeling and simulation (Lego path of construction) Supply chain and logistics Lifecycle (5, 7, 10 years) – Asset Class (MACRS) Financial metrics (ROCE, NPV, etc.) / jettison EVMS Transition to operations (no STO – CAPEX / OPEX) Modeling & Simulation (Stanford & ePM)

Element 5 – technology and systems Digital mapping, GPS, BIM, collaboration/ connectivity Integrated transaction platform (cognitive computing) Data-centric (lifecycle monitoring, inventory tracking, etc.) Multifunctional equipment, disposable (recyclable) Automation and robotics Multifunctional & Disposable Equipment (Biotechnology Manufacturing)

Element 6 – human resources Effective leadership (financial, decision-making) Organizational engineering (project team dynamics) Communications and information Recruitment, retention and training Man / machine interface 1/6th workers at site SAM Bricklaying Robot (Construction Robotics)

Element 7 – r&d joint venture and platform (technology-led) Element 7 – r&d joint venture and platform (40% Transactional Cost) (4% Transactional Cost) Capital Markets (Private Equity, Bonds, MLP’s, Owners, Syndicates) Banks (Open Source, Cloud-Enabled Thin Platform) Owners vs. Commercial Finance Integrator (IT) Tax EPC / CM Labor Logistics IT Sureties Regulators Legal Forex Insurance Tax CM Labor MRO Subcontractors Licensors Logistics Regulators Engineering Contractors Manufacturers Vendors / Suppliers Large Risk Mgmt. Raw Materials Cos. Distributors Manufacturers Raw Materials Companies (flatten the supply chain)

Owner total cost of ownership (TCO) 35% cost reduction 50% cycle time reduction 57% better ROCE 250% more projects 300% more profits for OS2 providers $4.3B Project STO STO $1.0B TCO Savings

Win-win for engineers, contractors and suppliers Cash flow leveling (Wall Street loves predictability) Ride out market’s peaks and valleys

Operating system 2.0 structure and timeline March 20, 2018 R&D JV company established Branding / marketing Investor prospectus Company visits Round I ends July 23, 2018 Formal kickoff (July 24, 2018) Incubator for new businesses R&D JV Company (Academic) Research SME Development Management Collaborative Space First Product: Integrative Platform

Closing comment “It’s unbelievable how much you don’t know about the game you’ve been playing all your life. Mickey Mantle

QUESTIONS? Call to action Work to maximize your value as a Project Norway member Invest your human and financial resources in OS2 Focus on using projects to create business value QUESTIONS?