View from the Field Part 1 - The Keynote Presentation and Segway to the Field

The foundation for this series of posts is the ABA Forum on Construction Law Meeting in October 2021 – Effective Project Management & Strategies: Turning Hindsight into 20/20 Foresight. The keynote speaker was Edward W. Merrow, Founder and President of Independent Project Analysis, Inc. (IPA). Mr. Merrow delivered an authoritative and compelling presentation Why Megaprojects Fail So Often and Why You Should Care No Matter the Size of Your Client’s Project. The presentation was moderated by Andy Ness, JAMS, Washington DC. Many of us know Andy as 2012-13 Chair of the ABA Forum on the Construction Industry.  Currently and additionally, Andy is Director at Large, Project Management College of Scheduling. Mr. Ness offered an extensive paper on the same subject, noting “This paper is written from viewpoint of the construction lawyer.”

I attended this ABA presentation, and have been a longtime follower and advocate of Mr. Merrow’s managerial and project development/delivery process. In 2013, I authored a (four part) series of articles for this blog. Mr. Merrow’s publication, Industrial Megaprojects, was a primary source for this set of articles and for Mr. Merrow’s recent presentation. This series of follow on posts are an extension of my 2013 articles, and may provide a framework for understanding some of the disputes we see in our industry. These posts are offered from the viewpoint of a practitioner on the jobsite, not an attorney.

For decades, I have been assisting clients in the proper development of project “Front-end’s” as well as managing “troubled projects” where the Front-end (or other managerial issues) have resulted in significant project management problems. Engagements included project practitioner as well as testifying expert.

Over the past six years, I have been in key roles on in-progress industrial megaprojects. Two assignments were project management-related, in the field, for prime contractors with construction based on fixed price (design-bid-build). The third was project management advisor for the owner (at project director level) during construction of a grassroots refinery. The contract approach was lump sum turnkey (EPC lump sum).

Mr. Merrow’s High-Level Findings

In Mr. Merrow’s presentation, he advised and emphasized that only about 35% of Megaprojects are successful. By contrast, major projects less than $500 million have a success rate of approximately 63% (hence even these projects experience a failure rate of one-third). Key metrics are: Cost Index, Cost Growth, Execution Schedule Index, Execution Schedule Slip, and Production Problems. Mr. Merrow’s theme for success – “The Front-end Makes the Megaproject.”

After Mr. Merrow’s presentation, I conferred with him and he confirmed key points in his current presentation and experience to be consistent with observations in my 2013 Dispute Resolver articles.

The summary, highest level findings (regarding Megaprojects) of Mr. Merrow’s presentation are:

• The Front-end makes (or breaks) (is essential for success of) the Megaproject
• Sponsors of Megaprojects have three critical responsibilities:
• Shaping – shape the project such that stakeholders are aligned
• Basic Data – technical data are correct and complete
• Front-end Loading – fully define the project before starting execution
• All of these are owner responsibilities alone (i.e., not contractors).

Megaproject Contracting Approaches (with many variations) (per Mr. Merrow):

• EPC Lump-Sum (Fixed Price)
• Reimbursable EPC and EPCm
• Integrated Project Delivery aka Alliancing
• Mixed (Design, Bid, Build)

Mr. Merrow addressed Megaproject Outcomes and Contract Types. The “Mixed” is the only approach that improves megaproject outcomes. EPC-LS and EPC/m reimbursable forms produce average results. IPD is disastrous for megaprojects, even though they are often reasonably well-prepared. Owner rating of Prime Contractor’s performance show EPC LS (26% Good, 30% Poor), EPC/EPCm Reimbursable (9% Good, 58% Poor), IPD (7% Good, 86% Poor), and Mixed (64% Good, 0% Poor).

Key points in Mr. Merrow’s summary of “Mixed” Contracting Approaches are:

• FEED, detailed engineering, and procurement by one firm, CM and construction performed by other(s) (Design-bid-build).
• Construction is usually lump-sum, CM sometimes owner-performed.
• Mixed form removes most of the FEED-associated moral hazard
• Dramatically lowers the risk profile for the contractors due to time-related risks.

Why Study Industrial Megaprojects?

Given Mr. Merrow’s findings, it is legitimate to question the value since most projects, although they may be large and/or complex, are not industrial megaprojects. The reasons are:

• Problems are similar on large & complex projects (not Megaprojects) – lessons learned
• Large & Complex success is 60%+, failure is +/-30%
• Formulas for success are valuable models for planning and execution of large and complex projects (not Megaprojects).

View from the Field – The Overview

Drilling down into a more granular level of detail, the issues may be embellished through the eyes of a practitioner (in this case, mine).

Interfaces – Mr. Merrow presented an extensive list of “Typical Characteristics of Megaprojects.”  His explicit characteristics include “Large number of interfaces” and “Multiple partners, stakeholders and other ‘interested’ parties.” In addition, the “Mixed” contracting approach introduces multiple interfaces that are transparent to the owner in other approaches (e.g., EPC-LS).

Every added interface adds managerial demands and complexity. Owners may (or may not) have the staff and expertise to deal with these additional interfaces.

Major implications (other):

• Asset Performance – ability to be placed into commercial operation at a capacity that us planned per specifications.
• Execution Planning – choosing the optimum (or an acceptable) strategy and contracting approach along with execution details.
• Scope of Work – correctly and robustly define the scope, including complete interface coverage (minimal gaps), that is sufficient to complete other planning that relies on scope definition.
• Time Management – preparation and implementation of a time-based managerial baseline.
• Cost and Progress Management - preparation and implementation of a cost and project managerial baseline.
• Procurement (including contracting) – multiple contracts (and possibly purchase orders) must be developed, awarded and administered.
• Data Management – preparing and implementing a data strategy along with use in managing the work.
• Labor Productivity – managing the risk of labor costs exceeding budgets due to inefficiencies or inadequate baselines.
• Completion Management – managing the transition from construction to operations (e.g., revenue-producing).
• Risk Allocation – allocation of a given risk to the party that is most capable of assuming and managing the specific risk.

View from the Field – Interface Management

Part 2 of this series will address the challenges of Interface Management that is required when using “Mixed” contracting approach.

Author George T. McLaughlin PMP CCM has worked worldwide in this industrial marketplace since the early 1980’s. He serves Owners, Prime Contractors, and Subcontractors. Mr. McLaughlin was president and COO of a $35 million engineering and construction (mechanical, controls and electrical) contractor for five years. For the most part, Mr. McLaughlin’s work is performed on-location where the relevant work is being performed hence the title “view from the field.” Mr. McLaughlin is a principal of McLaughlin & McLaughlin out of Austin, Texas. In this role, he provides program and project management services as well as litigation support services. His contact information can be accessed at his website (www.mclaughlinandmclaughlin.com) and blog (http://projectprofessionals.org/).