Productivity, according to Construction Industry Institute (CII) Director Stephen Mulva, has been on a steady downward spiral since the 1980s.
“Projects have obviously gotten more expensive, but the number of hours we’re using has grown exponentially,” he said, adding he believes projects will be unsustainable if they continue in this trend. “If the productivity decline continues, if the market price for some of the commodities that make this business stay at the old normal with the increasing cost of the projects, people just aren’t going to do these projects.
“We have these sacred cows in capital projects, and they’re really limiting.”
One of these sacred cows, Mulva said, is the manner by which capital projects are evaluated, with success being measured against the average instead of against a standard of excellence.
“The way we judge projects is wrong,” he said. “We say, ‘As long as we are in the ballpark, we are good. If we are a little bit better than that, that is better.’
“That is a C, and C is average, if you go back to your high school or college days. For my parents, that wouldn’t have been acceptable.
“How are we going to change this? You are going to have to challenge some of your old assumptions and sacred cows about how we go about planning and executing projects.”
The pace of change in the energy construction business is slow, Mulva said, especially when compared with manufacturing or electronics, “or maybe even health care.”
Regardless, he said, future success is entirely dependent on taking decisive action immediately.
Strategies to transform
Addressing delegates to the Energy Construction Forum held recently in Galveston, Texas, Mulva offered a number of strategies leaders could implement to transform the construction industry for the 22nd century.
“I want to challenge some of your assumptions about what capital projects should be about,” he said. “Maybe some of these sacred cows should just be put out to pasture.”
- Strategy 1 — Focus on the business imperative. While increasing specialization demands expertise, a proliferation of companies all involved in the same capital project may have different objectives.
“If you want to have a successful project, everyone on the project has to say that they stand for a successful project,” Mulva said. “If you just stand for yourself to make a name for yourself or your company, it’s not goal-congruent. It does not focus on the goal of the business objective. Everybody has to rally around that same point. Why would you do a project otherwise?”
- Strategy 2 — Embrace continuous (portfolio) planning. “We notice in benchmarking the data we have at CII, if you have a four-year project, you spend 15 months on average in front-end planning,” Mulva said. “That is unacceptable.
“The project start-gate process is really holding us back. It erodes shareholder value because in those 15 months it reduces the ability to forecast what the commodity is going to be worth at the end.”
Mulva recommends owners re-evaluate “every project and asset you’ve got” as often as every quarter.
“And don’t split up capital expenditure and operational expenditure,” he said. “Put them all together so you can think about all of the operational expenses and upgrades you are going to make to the facilities, and consider that all together with all the other projects you’re doing. If you re-evaluate this every quarter, you can really accelerate things.”
- Strategy 3 — Match the project to its asset class. In practice, Mulva said, a facility is designed to run for 60 or 70 years or more.
“Design it in a way that you can maximize the ROI (return on investment),” he recommended. “This is focusing on the business objective again.”
- Strategy 4 — Invest in research and development. One particular hallmark currently absent from industry that was present in the past 30 to 50 years, Mulva said, is individual engineering firms invested in research and development and developed new process chemistry.
“That is expensive to do, which is why they don’t do that anymore,” he said, suggesting companies would do well to combine the spirit of cooperation while maintaining a sense of competition.
“‘Co-opetition’ basically means you cooperate to do something. You cooperate to build a pie, and then you compete to divide it up. There’s got to be some unique value proposition here from the engineering community. Otherwise you’re giving up on these commodity rates.”
- Strategy 5 — Modularization and the six-tenths factor. Mulva encouraged leaders to take advantage of the “six-tenths factor,” touting it as “only half the story.”
“The six-tenths factor says that if you double the capacity of a piece of equipment or of a plant, the cost doesn’t double; it’s raised to the 0.6th power,” he said. “For example, if you double a $2 billion, 150,000 barrel-a-day plant to 300,000 barrels a day, it will cost $3.03 billion, not $4 billion. This is the operating principle that all engineering is done on, essentially.”
- Strategy 6 — Investigate robotics and automation. Mulva said industry leaders need not lament the increasing number of skilled craft workers who are retiring.
“I think we are in the wrong conversation here. We should embrace technology,” he said. “We should have droids.”
“What if you had a site that had no human workers on it, like Honda’s robots?” he continued, noting if a tornado or other catastrophe should occur and destroy a structure, it would be far better to lose a robot in the rubble than to lose a human being. “What is the value of a human life? I would much rather crush that robot. I think we’ve got to figure out how to move in this direction.”
Mulva noted Clark Construction in Washington D.C. recently built a high school by utilizing a semi-automatic mason (SAM) bricklaying robot.
“It increased bricklaying productivity by two to four times,” he said. “It worked with the masons. There are opportunities for this, and I think we really have to look at it seriously.”
- Strategy 7 — Redefine the project business ecosystem. While significant improvements have been made in safety productivity, constructability and numerous other areas of industry, “it’s not good enough,” Mulva said. “We have to be able to use the capital project to improve the business. It’s not just about improving the project; it’s about improving everything from project finance to risk insurance to percentage of completion accounting and more.”
Despite some advances, “the ‘business side’ is really behind the times,” Mulva said. “It hasn’t advanced in about 50 or 60 years. We could do a lot of really amazing things on projects if we were willing to take that on, but people are afraid of it. They want to look at the business side to see if they are profitable or not, but beyond that it becomes a shorter conversation.”
- Strategy 8 — Blow up earned value and project controls. Project control is not only an area where benefits may be quickly observed, but it also returns the most payoff, Mulva said.
“It is also something that starts demonstrating the shift toward being more innovative,” he said. “I think earned value is the root cause of our productivity problem. The way earned value is implemented is incorrect. We say, ‘We have to put this pipe from here to there, and the home office has given us 400 hours to do it.’ We get about halfway there, and we say, ‘OK, we’ve accumulated 150 man-hours out of the 400, so we can forecast that it’s only going to take us 300 to complete it, but we’ll write it down as 380 or 390 because we know some other part of this project will be just the opposite. They’ll give us 200 hours to do it, but it’s actually going to take us 400 hours. That way we can shuffle this around.’”
This “self-fulfilling prophesy,” Mulva said, only gets worse with time.
“After 40 or 50 years of this, this is the productivity decline,” he said. “This is not the A+ mentality. You should start with who you have, what the resources are and what they can do. In order to look at where the A+ student is, or the A+ project, you are going to have to have different project controls.”
- Strategy 9 — Don’t dismiss relational contracting. The profit to be made from a design-build bundle is greater than when elements of the project are completed separately.
“You make more money (bundling) than if you procure the components individually,” Mulva said.
Integrated project delivery (IPD) is also more profitable and results in more market share.
“Include the suppliers and logistics. Get them all to focus on the owner’s objective,” Mulva said. “If you have the right team and the right contract, you can accomplish great things.”
- Strategy 10 — Be frank about safety. A problem present in capital projects is industry’s inefficient “one-size-fits-all” approach to safety. Mulva pointed out there are different hazards associated with all the different activities in capital projects.
“If we get to the point where we are actually looking at the different risks instead of ‘one-size-fits-all’ safety, I think we’ll make some safety advances, and we’ll have a real good understanding of what the cost of safety is,” Mulva said. “Safety is critical; I’m not arguing that. We’ll keep this focus on safety because that is absolutely the right thing to do. I’m just saying let’s sharpen the pencil a little bit.”
For more information, visit www.construction-institute.org or call (512) 232-3000.
