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

2. 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

3. Best practices = outdated?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

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

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

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

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

8. 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

9. 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

10. 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

11. 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.

12. 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

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

15. (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)

16. 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)

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

18. 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

19. 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)

20. 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

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

22. 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

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

24. 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)

25. 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)

26. 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)

27. 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)

28. 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

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

30. 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

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

32. 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?