29 May, 2016
It’s probably of no surprise to those employed in the construction and engineering industry that a recent survey of over 350 mega-projects in the oil and gas sector shows a high percentage of projects fail to deliver on time or meet approved budgets.1
According to the same research, in the Asia Pacific region, 68% of the projects surveyed were facing cost overruns and more strikingly, 80% were facing schedule delays when measured against original estimates. The financial effect in real terms is staggering when you consider the regional value of these projects is thought to amount to some US$945 billion.
In the Asia Pacific region, cost and schedule blow-outs are not limited to the oil and gas sector either, particularly when you consider the number of mega-projects in the mining, power, civil infrastructure and public sectors (including main roads and transportation) that have more recently suffered from extensive cost overruns including delays and/or disruption.
Indeed, this is reflective of the current situation in Australia, where numerous factors — including the economic downturn in China (reducing commodity prices and therefore capital investment in major projects) and geo-political uncertainty — is affecting many a contracting organisation’s bottom line. Accordingly, such levels of overrun and associated cost blow- outs are not sustainable in the longer term.
In the first part of a series, we take a look at the importance of productivity monitoring and the strategic benefits of doing so in relation to commercial reporting, risk mitigation and recovery management.
"Contracting organisations with complex projects on the horizon need to take a more proactive stance when it comes to monitoring productivity to help establish and maintain a clear, commercially driven strategy…"
Given most major projects carry a fairly high degree of risk in terms of both time and cost, it is somewhat surprising that many contracting organisations fail to put in place adequate measures to record and monitor ‘production’ related labour and plant data to establish the levels of productivity actually being achieved at any given point in time on any particular aspect of a project. All too often, organisations simply focus on monitoring performance against the schedule and the effect on critical path, probably because this is more typically a contractual requirement. But in doing so, the expenditure of additional labour and plant hours to overcome internal and/or external factors is very often overlooked until it’s simply too late.
Poor productivity typically results in lower levels of efficiency and therefore increased costs. Relevantly, in the construction context, more often than not it arises as a consequence of ‘disruption.’ According to the Society of Construction Law Delay and Disruption Protocol, disruption (as distinct from delay) is, “disturbance, hindrance or interruption to a Contractor’s normal working methods, resulting in lower efficiency.” So, if caused by the owner or principal, the occurrence of disruption may give rise to a right to compensation either under the applicable contract or as a breach of contract.2
The concept of ‘disruption’ is hardly a new phenomenon in the construction and engineering industry and so, regardless of whether disruption is considered likely to occur, recording and analysing productivity outputs should form part of any contracting organisation’s daily/weekly housekeeping regime. Not only will this ensure that timely action can be taken to counter any labour and plant impacts, but it will ensure that where appropriate, entitlements arising under the terms of the applicable contract are preserved and losses evidenced.
The Need for a More Pro-active Stance
Contracting organisations with complex projects on the horizon need to take a more proactive stance when it comes to monitoring productivity to help establish and maintain a clear, commercially driven strategy and to avoid the negative impact that unresolved disruption or ‘loss-of-productivity’ claims and disputes can have on a project’s operations and completion.
Numerous factors can affect productivity, which if not addressed at the time of occurrence can simply become the norm, rather than the exception. Such factors can include:
- performing concurrent operations/activities that were planned to be sequential;
- un-planned joint occupancy of the site;
- congestion leading to a stacking of trades;
- staff morale;
- increased scope and/or variation work;
- poor or late access to work fronts;
- design changes;
- suspension, triggering a start/stop of certain activities;
- delays, leading to the re-allocation of labour and plant to other work fronts;
- plant breakdowns;
- weather, temperature and season changes e.g. cyclonic weather can significantly impact productivity during certain months in Australia; and
- lack of or insufficient management and supervision.
The early identification of factors that impair performance is essential to avoid incurring additional, unforeseen costs. Pro- active planning is therefore particularly pertinent on projects that are likely to suffer from significant scope growth, or those which are hamstrung with technical issues, whereby additional effort — over and above what was contemplated at the time of tender — is ultimately required to complete the project.
Of course, every cloud also has a silver lining and good record keeping is no different. Production data, when coupled with other contemporaneous records will prove invaluable if or when the need arises to prosecute a loss of productivity claim for which either the owner or principal are liable.
Good Practice or Wasted Effort?
In some industries, such as the resources sector, it is quite common for there to be a contractual requirement to submit productivity related data on a weekly basis in the form of a quantity man-hour report (“QMR”). A QMR is typically used to monitor direct man-hours expended on certain activities; establish progress (in physical terms); and quantify earned value. This information is typically used by owners and principals to ascertain how efficiently a contractor is performing in any given week on any given phase, commodity, facility or activity. It is generally linked to the work breakdown structure of the schedule and so is used more intelligently from a project controls perspective.
However, such information is rarely requested by owners or principals in other non-resource orientated sectors, particularly when projects are more traditionally procured under either management or Design & Build contracts.
Similarly, such information is also hardly ever retained by contracting organisations unless it is a contractual requirement or there is a penalty for not doing so.
So, does the resources sector have it right? Well, in part yes. Because regardless of whether you are an owner, principal or a contracting entity, failure to capture the relevant raw data, irrespective of whether it is a contractual obligation or not, will almost certainly prevent productivity from being accurately monitored. This hinders the identification of causative events, poor performance and disruptive trends, thus preventing corrective action, contractual or otherwise from being taken in a timely manner. Furthermore, if you are a contractor, neglect in this respect will very often prove fatal when the need arises, for instance when required to establish that breaches by an owner or principal have occurred and the causal nexus for the same (i.e. to avoid the pitfalls of a ‘global’ claim).
Why Prevention is Better than Cure
Measuring ‘productivity’ in real time to establish invaluable metrics such as man-hours earned versus man-hours expended on certain facilities, commodities or trade activities may ultimately be critical to a project’s commercial success, enabling more intelligent contracting organisations to:
- monitor production outputs against a baseline for each trade or series of trades;
- identify daily, weekly or monthly productivity ‘norms’ when carrying out un-impacted works i.e. works that have not been disrupted by internal or external factors;
- more accurately establish earned value;
- more accurately forecast the likely out-turn costs for all direct labour and plant associated charges (i.e. excavators, dozers, cranage), based upon the established ‘norms’ achievable; and
- monitor performance of the supply chain — to assist in identifying future cost blow-outs and potential sub-contract or supplier claims or counter claims.
In addition, from a risk mitigation perspective, measuring productivity effectively enables:
- the identification of unrealistic schedules, man-power and plant estimates, thus enabling corrective action to take place when and where it is most needed;
- mitigation of future tendering risks — by utilising productivity ‘norms’ established over the lifecycle of a project to inform the pricing of future work of a similar character and nature; and
- early identification of key project risks — using the information gathered to advise on the allocation of appropriate risk monies where necessary, much earlier in the project lifecycle.
Most significantly, when a multi-faceted recovery strategy is required to help preserve enterprise value and prevent or mitigate potential disputes from arising in relation to losses of productivity, good record keeping is vital to:
- help preserve entitlements arising under the contract;
- document the effect of causative events in order to support any prospective disruption claims under the applicable contract;
- assist in notifying claims and variations;
- enable robust payment claims to be prosecuted to facilitate cash flow under any security of payment legislation;
- assist in the negotiation process with the owner or principal to resolve commercially critical issues; and
- ensure global or total cost claims are avoided.
Whilst many projects in the construction and engineering industry are confronted with extensive cost overruns, including delays and more particularly disruption, the recording and monitoring of productivity — whether it is real time (i.e. daily) or regular (i.e. weekly or monthly) — has numerous benefits that can assist owners, principals and contractors with commercial reporting, risk mitigation and the implementation of recovery strategies.
Productivity losses can occur as a consequence of many different factors on complex, high-value construction and engineering projects, and disruption to an organisation’s normal operations typically results in additional cost and time burdens. Accordingly, in light of the current geo-political and litigious climate we live in, organisations should seriously consider adopting a more proactive rather than reactive approach to productivity monitoring in order to help prevent or mitigate wasted time, effort and cost.
In the next part of this series, the author focuses more specifically on recovery management, the need to avoid ‘global’ disruption claims and provides an overview of the various methods available that can be used to record, monitor and establish productivity. Moreover the author will explore how those methods can improve project performance and help safeguard enterprise value.
1 Ernst & Young – Spotlight on oil and gas megaprojects, 2014
2 SCL Delay and Disruption Protocol: October 2002; page 9 and guidance section 1.19 refer
For further information, please contact:
Jason Liew, Managing Director, FTI Consulting