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Inward Investment Guides

Successfully Managing Construction Mega-Projects

Choosing the right project delivery strategy, managing risk, and developing specific policies and procedures will ensure a project is completed on time and within budget.

Brian Relle , Director, Major Projects Advisory , KPMG and Clay Gilge , Principal, Major Projects Advisory, KPMG (Q3 2014)
Construction “mega-projects” live up to their reputations in many ways, including mega-size, mega-cost, mega-complexity, and mega-risk. Managing a mega-project such as a major infrastructure initiative or plant development project requires improved project management controls to avoid mega-costs and schedule overruns. Early planning and organization of a construction mega-project sets the stage for everything that happens after project authorization. Once machinery, materials, and manpower enter the picture, much of the planning flexibility disappears. By being smart about project delivery and contracting strategies and by putting appropriate project management controls in place, many project risks can be mitigated or eliminated. Adhering to the following leading practices for planning and organizing mega-projects will promote successful project completion.

Assign the project team early - Assign members of the project team right from the very start. It is best to assign a core team that will remain involved throughout the project rather than utilizing different teams during various stages of a project to promote accountability, transparency, and responsibility. The core team should include the following key personnel: project director, engineering manager, procurement manager, construction manager, and commissioning and startup manager.

Choose the right project delivery strategy - Selecting the right delivery strategy will drive the project’s cost, schedule, quality of design, construction approach, and long-term maintenance demands. The spectrum of project-delivery strategies ranges from those where the construction owner is fully involved in the management and execution of the project to where its involvement is minimal, and it relies on a turnkey contractor to coordinate all aspects of the project.

Delivery strategies can generally be placed into the following four categories:
  1. Traditional: design-bid-build, where time is not a driving factor
  2. Collaborative: construction management at risk, where there is a need for early feedback from construction experts before the design is complete
  3. Integrative: the owner, designer, and contractor all have a stake in the project and operate in the best interests of the project
  4. Partnership: public- and private-sector partners work together to execute large infrastructure projects with minimal public agency outlays
  5. Selecting a project delivery strategy is dependent on a construction owner’s desire for controlling various aspects of the project. For example, some owners have good in-house engineering departments that can prepare process and piping designs for others to build. Other owners may be more comfortable handling the purchasing of all the major equipment items. Whatever project delivery method is selected should be aligned with the owner’s scope objectives, resources, speed to market, cost and quality expectations, contracting and contract administration capabilities, and overall risk appetite.
Develop realistic estimates - Project teams need to be both cautious and realistic when developing project estimates. Have the core team validate initial concept estimates and identify significant estimating errors and omissions. During the design development stage, rely on parametric cost estimates and benchmark data that are recognized industry-wide, rather than on your own internal estimates. Develop pricing models based on a range of possible outcomes.
Expand Construction Project Management And Control Categories
Close Construction Project Management And Control Categories
Chart: Construction Project Management And Control Categories
As the project moves into the feasibility stage, conduct preliminary studies that produce a “design basis” estimate including all engineering quantities, craft and supporting labor hours, commodity pricing, equipment pricing, project management costs, and internal company costs such as shared services, management time, financing costs, and interest expenses utilizing appropriate engineering and procurement resources. Depending on the length of the project, factor in the impact of price escalation on commodities, labor, and equipment.

The project estimate should have a predictive accuracy of minus 15 percent to plus 20 percent. If the estimate is prepared correctly, the project team effectively represents that the estimate is realistic and achievable, that quantities and pricing have been checked and validated by both internal and external engineering resources, and that the project team is committed to managing cost within the relative percentage band surrounding the budget estimate.

Your project team will also develop estimates of the time needed for completing the project. The duration and completion dates of interim milestones such as detailed engineering, long-lead equipment procurement, site work, and testing and commissioning will be discussed and agreed upon. It is important that experienced Critical Path Method (CPM) schedulers and estimators are involved in the development and vetting of the project’s initial schedules.

Actively manage project risks - Risk management is about identifying risks, both internal and external, to the successful completion and implementation of the project. Project risks and their attendant questions can be characterized as follows:
  • Technical risk: How mature is the proposed technology? What happens if the technology fails?
  • Scope risk: Is the project scope defined adequately in sufficient detail?
  • Schedule risk: Are activity durations reasonable? What is the risk of extending the project?
  • Cost risk: Are cost estimates based on current market pricing? Have allowances for undefined project components, design development, escalation, and other contingencies been included?
  • Human resources risk: Will sufficient skilled resources be available when needed? How can they be retained for the duration of the project?
  • Regulatory risk: Have all regulatory risks been defined? Are any permits or approvals on the project’s critical path?
  • Safety and security risk: Is craft labor trained in construction safety procedures? Is the project in a locale where there is a significant security risk to personnel and property?
  • Political risk: Is the project subject to periodic funding approvals? Does the project have strong political approval and backing?
Project risks should be captured in a risk register, a dynamic document that is updated throughout the project as new risks are identified and other risks are closed out. The project team should also determine the cost impact of significant risks and opportunities through quantitative cost risk analysis. Probabilistic techniques such as Monte Carlo simulation are used to calculate the amount of reasonable risk contingency that should be carried in the project budget. Similarly, quantitative schedule risk analysis may be used to determine a realistic project completion date.

Obtain senior management buy-in - Every corporate mega-project must have strong senior management buy-in to be successful. Before the project is approved, a complete project charter, project execution plan, baseline budget, and baseline schedule must be prepared and vetted by the project team. Engineering designs to approximately 35 percent completion, cash flow models, financial analysis, and funding methods all must be evaluated and developed to the point that the project can be visualized and built “on paper.” Most importantly, the project must be strategically aligned with the company’s and stakeholders’ current goals and objectives and considered the best use of capital funds by senior management.

The project is reviewed by a capital projects committee or investment committee - made up of executives from various company functional units, including CEO, CFO, finance, legal, internal audit, and operations. Regional and divisional managers also play a role, particularly when the project will be built outside of the company’s usual area of operations.

A project sponsor should be appointed whose role is to report on the progress of the mega-project, discuss project risks and challenges, and update senior management regarding the project’s financial and other resource requirements.

Develop project-specific policies and procedures - The success of a mega-project depends on successful collaboration within the extended project team, which includes the construction owner’s team; joint venture partners; lenders; insurers; outside counsel; the engineering, procurement, and construction (EPC) contractor; subcontractors; suppliers; and others. Collaboration requires a robust set of policies and procedures, clear roles and responsibilities, and frequent communication.

While a company may have policies, guidelines, and procedures for managing large capital projects, it is recommended that the project team develop tailored policies and procedures appropriate to the specific needs and circumstances of the mega-project.

Project managers cannot manage a mega-project simply by drawing on industry experience and applying technology. Being thoughtful and deliberate about the controls put in place during the planning and organizing phase can increase the probability of a successful project and increase the confidence executives have that the project will be completed on time and on budget.

The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG LLP.
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