Project management approach for small capital projects
Worldwide, the petroleum and chemical industry spends billions each year to maintain the existing manufacturing facilities. With the exception of routine maintenance tasks, all other retrofit and de-bottlenecking efforts may be best executed as small capital projects. A proven approach of managing the small projects is presented in this paper.
For this paper, we will define a small capital project as a project with total installed cost of $1.0 million or less. We will consider a program consisting of hundreds of small capital projects at Tennessee Operations of Eastman Chemical Company. The example should be valid for any other large chemical company with multiple operating units or business lines, and hence many internal customers. The challenge is to ensure individual satisfaction of each customer by delivering superior value in terms of cost, schedule, and quality for each and every project. The challenge may be met successfully with a systems approach to project management.
The nature and purpose of the capital expenditure may vary widely (de-bottlenecking, environmental compliance, quality or yield improvement, etc.). These improvements to the plant or facilities may involve multiple sites and multiple operating units. Due to this variation, it may seem easier to let each operating unit implement its improvements independent from each other and use informal methods such as work orders. Why formalize them as projects? The answer lies in efficiency and control.
Efficiency can be viewed in two ways:
•Efficiency in allocating capital to competing projects depending on their rate of return
•Efficiency in execution such as economy of scale and synergistic use of limited resources.
Both kinds of efficiencies are possible only in a project framework.
Control is the ability to implement the facility improvements within the expected cost, schedule, and quality standards. Time and again, experience tells us that cost/schedule control can be best achieved in a project environment.
With these considerations in mind, Eastman’s Tennessee Operations has established a formal system of small capital projects. The system encompasses projects from all operating divisions within the Tennessee Operations. There are three aspects to the system:
•Capital allocation / project selection
•Planning and alignment with customer’s objectives
•Efficient project execution.
Capital allocation/project selection is an evaluation of competing projects based on objective criteria of economic value, or regulatory compliance, etc. The evaluation, made by the Tennessee Operations’ project management team, is in close coordination with the operating divisions and other stakeholders.
Planning and alignment with customers’ objectives and efficient project execution is addressed by a joint team of Eastman and its alliance partners. Bechtel Corporation is Eastman’s alliance partner for engineering and procurement. For over 15 years, Eastman and Bechtel both have concluded that owner-contractor alliance is the best method to assure success of the small capital project program. Only an alliance can afford the key attributes of success for any small project program.
With this background, let’s discuss what are the key attributes of success in a small project management system. In the author’s opinion, there are five key attributes of success. They are:
1. Utilization of contractor resources through alliance or continuous service agreements.
2. Integration of work processes between owner and contractor.
3. Alignment of program objectives with the requirements of each individual project and customer.
4. Setting fair expectations about cost and schedule.
5. Metrics and continuous improvement.
In the background section, we touched upon the importance of setting up an owner-contractor alliance. From a practical standpoint, it is not feasible to competitively bid each and every small project. Plus, most small projects are not suitable for a lump sum contract because generally they involve retrofit type of work. Therefore the suitable contract arrangements are reimbursable with or without incentives. Incentives do help in achieving desired results for the owner, but a formal alliance agreement goes one step further. An alliance ensures that the business arrangement between owner and contractor is a win-win for both companies. It provides incentive to achieve synergy between the two organizations.
Exhibit 1. Alliance Building Blocks
Exhibit 2. Priority Ladder
The basic building blocks for a live and thriving alliance are shown in Exhibit 1. Team spirit and mutual trust provide a firm foundation. Technical competencies such as knowledge of existing plant facilities, process systems, and best practices for the specific plant, together form the second building block. Knowing the operations and maintenance people is also important. Work processes related to project management, engineering, procurement, construction, and commissioning, together form the third building block. Integration of the work processes between both companies is discussed in the next section. Tools such as computer hardware and software, intranet connectivity, and communication tools, together form the fourth building block. The fifth building block in Exhibit 1 is R+, which signifies positive reinforcement and recognition. It helps to bond the alliance team. It inspires team members to work hard and deliver superior results.
Both parties in the alliance should work together to put the above building blocks in place. For example, two years ago Eastman and Bechtel jointly developed several initiatives to improve or reinforce the building blocks. Joint teams were formed and the best practices from both companies were integrated.
A critical success factor in an alliance is the long-term commitment by senior management from both companies. Long-term view needs to be emphasized because the alliance may take five to ten years to deliver truly outstanding results. First few years, the alliance requires significant investment by both parties, e.g., (1) the alliance has to develop and implement integrated work processes, (2) the contractor personnel have to come up the learning curve about the owner’s specifications, plant, and machinery, and (3) the team members on both sides have to be aligned by their job functions; they have to build trust and relationships.
Integration of Work Processes
Once the alliance is established and teamwork is in place, the next important task is to integrate work processes between the two companies. A complete integration is generally not practical. Some work processes may not lend themselves to integration in light of the strategic objectives of each company, and that is not a problem. Once the companies evaluate the work processes against their own strategic objectives, together they can agree upon a list of candidate work processes chosen for integration.
Integrating the candidate work processes is a difficult task. Employees are trained in the work processes of their respective companies, and they resist change. Therefore, it is best to set up joint teams of the stakeholders from both companies and let them develop the new integrated work processes. Then the employees feel ownership and ensure successful implementation of the new work processes. The development and implementation of the new integrated work processes may take one to three years. The efforts consume time and resources. This period is a real test for the managements’ commitment. But once the new work processes are fully adopted, the improvements in efficiency are phenomenal.
Alignment of Objectives
Now that we have discussed the overall alliance framework, let’s consider the success factors for individual projects. After all, the success of the alliance depends on success of the individual projects.
Suppose there are hundreds of small capital projects being executed simultaneously for various operating divisions or corporate entities. Each project has multiple customers and each customer has multiple objectives. On the other hand, the company as a whole has goals and objectives also. Sometimes these objectives may be conflicting. For example, the company as a whole may want to minimize capital spending or cost, while a specific project may require a fast-track schedule at any cost. Such a situation is detrimental to the project because success depends on clear goals and objectives. Therefore the first order of business is to align individual projects and their customers with the objectives of the whole company. A candid discussion is warranted between all stakeholders. The product of the discussion should be a clear and concise statement of project objectives and priorities. A priority ladder like the example shown in Exhibit 2 can be an excellent graphical tool to convey the message to the project team.
Exhibit 3. Performance Summary Metric
Fair Expectations of Cost and Schedule
Often the seeds of project failure are planted right at conception due to false expectations. Generally speaking, the customers from operating divisions do not have expertise in cost estimating or planning and scheduling. They may have unrealistic expectations about cost and schedule. A project manager needs to correct these expectations early in the concept phase. If the project manager waits till preparation of a definitive estimate, it is too late. The longer the project manager waits, the harder it is to correct the customer’s expectations. In order to make a quick assessment of the cost and schedule, the project manager should be armed with sound thumb rules and lot of historical data. The standard published thumb rules such as factors based on equipment cost do not work for all small projects. Many small projects have only one to two pieces of equipment and some don’t have any equipment at all. In those cases, the project manager has to estimate the magnitude of the largest commodity, e.g., piping, electrical, or civil, and then factor other costs.
Another important consideration is the labor/services cost of the contractor. Often the small projects involve retrofit of existing plant and facilities. The retrofits are inherently intensive, and the labor cost is an important driver of the total cost of the project. The labor cost is not only important for the specific project, but also it is important to ensure a long-term healthy relationship between the owner and the contractor. For example, in the case of the Bechtel—Eastman alliance, it is important for both entities to know that the cost estimate of Bechtel’s engineering services is fair and not inflated. The best way to ensure the fairness is to measure performance against a metric such as the “engineering services cost as percentage of the total installed cost.” Eastman and Bechtel do not stop at measuring performance, but go one step further by setting continuous improvement goals tied to the metric. When Bechtel achieves the continuous improvement goals, Bechtel earns incentives while Eastman benefits by reduced cost on the projects. Such win-win solutions are essential for a healthy alliance.
Metrics and Continuous Improvement
As explained above, historical data is useful to the project manager in developing quick cost and schedule estimates and in setting fair expectations at the beginning of the projects. The historical data serves one more important purpose. It allows benchmarking of the past performance and a springboard for improvement in future performance. What gets measured gets action.
The alliance team should agree upon a few meaningful measures that are aligned with the company objectives. The measures should not vary from project to project because then the program management would not have a barometer to measure the overall progress from year to year. The standard measures should be updated at least once each quarter covering the data from projects executed in that quarter. The measures should be posted in the work areas so that the team members can compare their performance to their goals. Also it is a good idea to post a visual/graphical summary of the team’s performance. An example is shown in Exhibit 3. In this graph, the team’s performance rating on a scale of 1 to 10 is plotted for each measurement criteria. The points are connected and the resulting polygon is shaded. The shaded area depicts the overall performance. Thus, the graph communicates the entire story in one glance.
The measures pinpoint the deficiencies and improvement areas. It is the responsibility of both parties in the alliance to assist each other in overcoming the deficiencies.
The measures also help the alliance in setting tough but achievable goals. Such goals are great motivators. For example, two years ago Eastman and Bechtel together set a goal of improving small project engineering duration by 20% from the baseline of historical average duration. The small project team was convinced that the goal was achievable if Eastman and Bechtel were to put the barriers aside and work side by side with one common goal. When the chemistry is right, teams rise to the challenge; the small project team met the goal. It was a tremendous success because not only the goal was met, but also the shorter duration meant less labor cost and higher customer satisfaction.
Small capital projects can be executed with efficiency and cost/schedule control. Key attributes of the small project management system are: (1) a healthy alliance between owner and contractor, (2) integrated work processes, (3) alignment of objectives and people resources, (4) fair expectations, and (5) metrics and continuous improvement.
Proceedings of the Project Management Institute Annual Seminars & Symposium
September 7–16, 2000 • Houston, Texas, USA