Successful projects depend on the business
Frank R. Parth, MS, MSSM, MBA, PMP
CEO Project Auditors LLC
This paper looks at the literature on successful critical projects and examines the impact of decision making on project success. When are the most critical decisions made? Who makes them? Where are the sensitive areas that can have a huge impact on project success? Research in this area shows that the only part of the effort where traditional project management approaches make sense is in the later stages, the engineering, procurement, and construction (EPC) stages. The earlier stages require a different approach to ensure success.
Though all projects are dependent on decisions made outside the project, large projects are particularly susceptible because of the increased number of stakeholders and increased complexity. This paper will focus on the pre-project decision process for large construction, engineering, and infrastructure projects. We will examine how these projects are most effectively divided into several stages and compare the approaches promulgated by both academic research and private industry. They are all consistent in identifying the critical decision points.
We will examine those critical points, the data needed to receive a “go” decision, and who should be involved in those decisions. We will see that the data need to be increasingly complete and accurate the later in the life cycle the decision is made. Giving the engineers and contractors bad data will ensure cost and schedule overruns as well as claims. Yet the most critical decisions are done when we have the least amount of accurate data, before the project managers ever get involved.
We will look at the following four areas and provide recommendations for the project manager at the end:
- The business environment,
- Current research,
- Approaches to assessing the adequacy of early planning, and
- Proposed development stages for programs.
The Business Environment
Our normal approach to detailed planning assumes perfect predictability and so builds rigidity into our management approach by writing schedule and cost constraints into the contracts given to the contractors who will do the actual work on the project. Locking in the approach through contracts makes sense from a pure planning standpoint, but it also builds barriers in our ability to respond to future unknowns and to changing circumstances. Freezing the future in such a way ensures construction claims resulting in schedule delays and cost over-runs when the future is not exactly how we assumed it would be.
This traditional planning approach focuses on the details of the project itself, defining the activities needed to do the work and predicting how long the project “should” take and how much it “should” cost. For a long-term project there are too many external influences over a long period of time that impact our ability to accurately predict the future. In late July 2015 the Financial Times (Adams, 2015) published an article that said US$200 billion of oil projects were put on hold due to a drop in crude oil prices. Although these large-scale projects are inherently complex along multiple dimensions, the business environment is even more complex and is subject to unpredictable influences. The World Bank and others have a term that describes greater uncertainties faced by the business: VUCA—Volatility, Uncertainty, Complexity, and Ambiguity.
If an owner hires a developer to construct a small office complex that is 6 to 12 months in development, he or she has some assurance that the economic environment will stay reasonably stable. There are notable exceptions to this, but in the long run the owner can make reasonable business decisions based on that assumption. But in a project that is three, five, or eight years long, how big of an impact is the external environment? Even more important is that changes to the economic environment are relatively unpredictable. For mega-projects, the decision process is much more complex, requires long-term thinking, and involves people not directly associated with the technical details of the project: business management, international financers, government agencies, and so on.
The ultimate success of a complex effort depends very little on how the projects are managed once the construction phase begins, and far more on what happens before that phase. If a US$10 billion Liquid Natural Gas (LNG) refinery runs late and over budget, the failure has started long before the project schedule was created or the procurement (EPC) process begun.
The financial performance of these projects is inherently fragile. Because of their complexity and the changing external environment, and due to interactions among the multiple components, their response to an input is not a linear relationship,. The behaviour of these systems is better described by chaos theory than by classical project management. Chaotic projects can suffer huge changes in their behaviour with small changes to their inputs. Perhaps a better term for such semi-chaotic projects is that promulgated by Rittel and Webber (Rittel & Webber 1973) and by D. J. Hancock (Hancock 2002). These projects are often called “wicked messes.”
A strong strategic planning process will not attempt to predict a single future environment. Instead, it will predict several possible future environments, assigning a probability to each. Decisions are then made based on the decision maker’s “most likely” prediction. As an example, we can look at the historical data for crude oil prices. In 2013, the Economist (Economist magazine August 3, 2013) showed the history of oil prices stretching back to 1861, normalized to 2011 prices (original data obtained from BP) (Exhibit 1).
Exhibit 1: Historical data on crude oil prices.
Though for most years the prices have been relatively stable, there are a few periods where large changes in the prices significantly impacted projects that were in the works at the time when the changes occurred. More recently, the economic environment has become even more challenging as the price of crude oil continues to drop. Compounding the difficulty of predicting the future price of feedstock is predicting the future demand for our final product. Future forecasts of expected oil usage vary by millions of barrels per day, depending on what assumptions the analysts make. These are huge business uncertainties that the project managers do not have to deal with.
An increasing body of evidence from private organizations such as Independent Project Analysis, Inc. (IPA), professional organizations such as the Construction Industry Institute (CII), and research sponsored by PMI, private for-profit industries such as Anglo-American Mining, and academic research suggests that the most critical decisions—the ones most likely to make a project succeed or fail—are made by the business decision makers long before the design and construction stages start.
With this in mind, this front-end development (FED) approach to the project should begin long before the engineering design/EPC phases begin. The seeds of project success are sown in the very earliest setup stages of a project, before the engineers ever get involved. Sato and Chagas (Sato. C. E. Y., & Chagas, M. de F. Jr. 2014) propose to “redefine” the concept of project lead time (PLT) to encompass the time between the project initial idea and the moment in which success is being assessed, which can be beyond the project closeout.
Jergeas (Jergeas, G. F. 2008) characterizes the pre-EPC phases and adds decision points: identify and assess opportunities, select from alternatives, develop the preferred alternative, execute, operate and evaluate. Each of these phases is followed by a decision gate as shown in Exhibit 2.
Exhibit 2: Jergeas project phases.
- Phase 1 activities (typically 1% of the engineering costs of the project): clearly frame goal, test for strategic fit, preliminary overall plan, preliminary assessment
- Phase 2 activities: generate alternatives, preliminary development of alternatives, develop expected value, identify preferred alternative
- Phase 3 activities: fully define scope, develop detailed execution plans, refine estimate, submit funding for approval. These Phase 3 activities may consume up to 25% of the engineering costs. The authorization for expenditures (AFE) is made at the end of decision gate 3.
- Phase 4 activities: implement execution plan, minimize changes, finalize operating plan, business plan for Phase 5, project review
- Phase 5 (operations) activities: operate asset, monitor and evaluate performance, identify new opportunities
Hutchinson and Wabeke
Hutchison and Wabeke (2006) developed a model for the phases of complex engineering and construction projects. Their model has five phases: identify and assess, select, define, execute, and operate. They plotted the value of each phase as shown in Exhibit 3.
Exhibit 3: Impact on value with early decisions.
The greatest value is provided in the early, business-owned phases: identify and assess opportunities, select the “best” opportunity for further development, develop the details of the selected opportunity, and then go through the execution phase (project planning, detailed engineering, and construction efforts). Phases 1 and 2 belong to the business, Phase 3 starts involving the engineers and some project management, Phase 4 is all project management and construction, and Phase 5, Operations, goes back to the business.
No amount of good engineering, management, and construction will provide as much value if the project was the wrong one to begin with. Conversely, even good project management will not recover all the value in a poorly selected project. Though this has been widely recognized among practitioners of complex projects, their efforts are one of the first significant attempts to quantify the impacts of the business decision process on project success.
Research by Klakegg on Early Warning Signs
Klakegg, Williams, Walker, Andersern, and Magnussen (2010), in research sponsored by PMI, studied literature on complex projects to attempt to identify indicators of future problems early. They developed a model similar to the one shown in Exhibit 4 to use in comparing several complex projects across a variety of industries. The model begins with the business development stage, where the initial decisions are made based on strategic planning goals, and identifies several major stages that must be done effectively before the engineering and construction phases begin.
Exhibit 4: Klakegg et al.’s early warning signs.
Before the project begins, and several times during the early stages, go/no go decision gates are inserted into the process. The decision gates, DG0–DG4, are defined as:
- DG0: Decision that the idea is formally recognized in the organization as an acceptable initiative with a person appointed as responsible for following up and spending resources in planning the initiative up to the next decision gate.
- DG1: Decision that the initiative is acceptable for further investigation and resource consumption. Further investigation will include identifying principal alternative solutions for decision makers to choose from.
- DG2: Choice of concept; the decision implies that the initiative is acceptable for further planning and includes choice of the conceptual solution to be investigated in a pre-project.
- DG3: Decision about financing and execution of the project. In this reference model, this gate is associated with the “go/no go” decision.
- DG4: Decision to accept the project’s outputs/deliverables as complete and commence operations.
Of particular importance is that the most critical gates, DG0–DG2, occur before the engineering and construction phases. These gates all belong in the realm of business decisions. There is typically no project management, detailed engineering, or contractor involvement. Indeed, the model assumes that once the go/no go gate at DG3 is successfully passed, there will be nothing requiring additional decision gates. Considering how extremely challenging these projects are, this is a significant shortfall in the model.
It is often true that for-profit organizations are much better at developing efficient processes than academics who come along later and study them. The mining industry faces many of the same challenges as the oil/gas (both upstream and downstream) industry: high regulatory burden, environmental impacts, as well as strong opposition from environmental nongovernmental organizations (NGOs), high profit risks, fluctuating prices for raw materials, and so on.
The international mining company, Anglo-American, has for many years faced multiple, serious risks on any mining project it engages in, as do all other international mining companies. The company’s stages and gates approach reflect a consistent view and includes the following:
- Opportunity identification,
- Concept development and conceptual studies,
- Analysis and prefeasibility studies,
- Planning and feasibility studies,
- Commissioning/production ramp-up/handover, and
At the end of each of these stages, except for closeout, there is a go/no go decision whether to continue or not.
In addition to developing stage-gating processes to better plan these projects, approaches have also been developed to assess the planning effort. Two of the more widely used processes in the engineering and construction industries are the front-end loading (FEL) process and the project definition rating index (PDRI).
Independent Project Analysis (IPA) has done research on large projects since 1987 and has accumulated a significant database of what causes these projects to succeed or fail. They have advanced the concept of preplanning the project very early in the business cycle through a three-stage front-end loading process. The first stage is purely about the quality of the business data and the decisions that result from them. There are extensive questions about the thoroughness of the business case, team sponsorship and dynamics, and analysis of any alternatives. This first assessment is a business expense and does not come out of the project budget.
The second assessment is identifying the thoroughness of the scope development. The questions revolve around the site factors, the design status, and the project execution plan (PEP). The emphasis here is on the completeness and accuracy of the data that will be used in making the decision to go forward or not. For an oil/gas refinery, 100% identification of the process flow diagrams (PFDs) is a go/no go gate to continue. The PFDs are normally developed during the front-end engineering design (FEED) process prior to the EPC phase.
The third assessment is done to prepare for the authorization for procurement decision. Here, the areas looked at again include the site factors, the design status, and the PEP, but in much more detail. For process plants, there is a go/no go gate revolving around the processing and instrumentation diagrams (PIDs). If the PIDs are not sufficiently detailed, the decision should be to go no further until a sufficient amount of data is available.
Project Definition Rating Index (PDRI)
The PDRI was developed by the U.S.-based Construction Industry Institute to assess the risk of projects in the fields of industrial projects, infrastructure projects, and building projects.
Each question is weighted for its impact to project risk. The first set of questions, the ones that have the greatest weight in determining a project’s risk, are all business-oriented questions: building use, business justification, business plan, economic analysis, and owner philosophies on reliability, maintenance, operational, and design. In this respect, the PDRI is similar to the FEL process because of the heavier weights given to the early business decisions.
Both the FEL process and the PDRI process assess the quality of early planning. FEL assessments are done earlier than PDRI assessments and look at different factors. Both show clearly the heavy impact of pre-EPC decisions on project success.
Proposed Development Stages for Programs
With all this independent research by both academics, consultants, and commercial companies, we have gained a fair amount of confidence that our normal approach to managing complex projects simply doesn’t work. There is a better way to approach this. Based on the previous discussion, we have created a combined model with an emphasis on the decision gates, as shown in Exhibit 5.
Exhibit 5: Development stages for long-term projects.
At each gate specific data are required and specific criteria must be met for the decision to go forward. If data are missing or are inadequate, the decision must be to not approve further work until the data are sufficient. A gatekeeper should be identified whose job description is to track the data needed and ensure that they are adequate for the decision makers to make an intelligent decision.
BG1—Business Decision Gate 1
This is the initial decision by the business to begin a new project or not. For the financial resources that can be made available, in which projects should the organization invest?
- For an aircraft development company such as Boeing or Airbus: Preliminary work is done to identify what the airline industry wants in terms of aircraft, fuel efficiency, demographics, and flying patterns. This is done by the business to identify future needs.
- For an oil/gas company: Which are the most potentially profitable new fields for development at an acceptable level of risk? Or is the money better spent refurbishing and upgrading an existing facility?
- For a public works infrastructure project: What financial resources are available through taxes or bonds? Which possible projects will return the greatest public benefits?
This is the most critical decision point. Everything done later builds on this. There is a significant amount of pre-project work that should be done to ensure success. The project at this point is led by senior executives—vice presidents and above. Unfortunately, they are, as a rule, far removed from day-to-day management activities and even further removed from project management activities. Their decisions are made without detailed analysis of whether the project is feasible or not.
BG2—Business Decision Gate 2
Once a variety of potential opportunities has been identified, work is done to develop the most beneficial ones. This is an area where the FEL process works very well and can provide significant information before a decision must be made to continue or not.
Decisions made here are at the level of middle management—managers, senior managers, and directors, with input from the technical staff. These people will be taking the technical analysis and deciding which of the alternatives should be carried forward and developed in more detail.
The emphasis here needs to be on making the “best” decision possible from the viewpoint of obtaining benefits. The details of the data needed for that decision must be determined in advance and the decision criteria for a go decision should also be determined in advance. Any really critical items (such as PFDs or the PIDs emphasized in the FEL process) should be clearly identified.
If some of the data are marginal for a go decision, these become risks to the project, and the project manager should give them a high priority. The process in getting to each decision is a project itself, with the goal being to gather and analyse the data needed for the business to make a good decision.
There is no specific schedule to be met here; the effort should take as long as necessary to produce the information needed to make an intelligent decision. For a pipeline project in Canada (Muiño & Akselrad 2009) this effort took three months and cost about 1% of the total project budget.
EG1—Engineering Decision Gate 1
In preparing for EG1, the technical staff and the project managers start getting involved in the project. Here, we are beginning the design of the facilities (this is the FEED stage) and the planning for managing the execution itself. This does not mean the businesspeople have backed away from the project; they are still heavily involved in this stage. At some point towards the middle or end of this stage, there must be an authorization for expenditure (AFE) to approve the funds that will finance the remainder of the project.
Turning again to the FEL approach, three areas are explored to determine readiness to continue by the second time FEL is performed: site-specific factors, design status, and project execution plan. If the PDRI assessment tool is being utilized, this stage would be a reasonable place to perform the first survey. The resulting numbers will not be good because much of the work has not been done yet, but the scores will improve as the PDRI is repeated in later stages.
This decision gate is one where ensuring that accurate and complete data are available becomes critical. Rather than the business making the decision to continue here, it should be the engineers’ and the project manager’s decision whether to continue on or not. If the data are not adequate, the decision should be to continue to develop the data before going on.
PMG1—Project Management Decision Gate 1
Preparing for this gate is where traditional project management does best. The businesspeople have stepped back from day-to-day involvement in the project and the work is being controlled by the engineers and project managers, with construction contractors involved in the planning efforts. This gate is the beginning of the execution phase. This is where the majority (typically 85–90%) of the overall costs will be spent and the greatest amount of time committed. Both the FEL and the PDRI have areas related to this stage.
At this point, the data required for decisions should be getting much more detailed and the project planning areas should be much more thorough.
PMG2—Project Management Decision Gate 2
This is a combined decision point of the project management team, the engineers, the contractors, and the operations/maintenance people from the business side. Here, the decision is made to start the commissioning process and slowly ramp up production to full scale.
One consideration in the decision is: How has the economic environment changed since we started? If the price of the feedstock for a processing plant has risen, the price of the final product has dropped, or the regulatory environment has changed significantly, then the decision becomes nontrivial. What does the future economic environment look like? This is not a decision for the engineers or the project management team. This becomes a decision on the business side to continue if the future looks profitable or to mothball the plant if it does not.
BG3—Business Decision Gate 3
Of all the gates, this one might be the least important. It is not trivial, but it is the gate that has the least impact on whether to go into full operations. If everything earlier has been done with a reasonable degree of success, the only data that can cause a negative vote to go forward will come from the outside environment. If a company has spent six years developing a new oil refinery, then the only thing that can cause it to mothball or decommission the project at this point is if oil prices have dropped so low that they would lose money by operating the plant.
For infrastructure projects, BG3 will always be a positive vote to go forward. Regardless of the actual benefits achieved, there is no benefit to not opening roads, bridges, and so on. If the politicians requested a project and it has been completed, nobody is going to say don’t use the new road (with rare exceptions).
Project managers have to little influence over the earlier business decisions. But with four changes in the traditional approaches, classical project management works fairly well in the later stages after the project moves to the planning and execution phases.
To increase project success a different approach must be taken than traditional project management. The first is to treat each such new project as you would treat setting up a new business. The future is unpredictable and subject to outside influences this requires an entrepreneurial approach.
Identify the goals of this new business and set up the organization chart and the financing to achieve those goals. While there needs to be support by the parent organization (or organizations in the case of a joint venture), the PMT needs the flexibility to develop their own approach as much as possible to the project.
The research clearly shows that to make these projects successful the emphasis must be placed on the pre-engineering stages. Competent decisions made here will significantly improve the success rate so there must be heavy involvement from the business users. A business “owner” should be identified at the very beginning stages and remain with the project into operations.
These kind of projects require a strategic planning document (SPD) that will guide the project once the business has authorized the release of funds for the project. It may begin as early as the end of the feasibility analysis (EG1) but should begin no later than the end of the engineering analysis (PMG 1).
Increased Risk Management
Project managers typically spend little time on formal risk analysis. A risk is something that “could” happen in the future, and most project managers are too swamped with planning and running the day-to-day details of the project to worry about something that might not happen.
A more effective risk management approach is to emphasize formal risk management processes with the staff and tools needed to thoroughly understand those things that can impact the successful completion of the project. Professional risk managers with experience in the specific type of project should be used.
The universe of risks should be all-inclusive, with a particular emphasis on external risks such as environmental, regulatory, labour, and so on. These are the risks that are far more likely to be uncontrollable than the technical risks of the project.
Stakeholder Identification and Management
Though identifying the primary stakeholders is important enough on a software project, it becomes more difficult, more complex, and more important by orders of magnitude on a mega-project. It can easily be shown that a primary job of the program manager on these programs is to work with the stakeholders.
In fall 2011, the U.S. federal government’s General Accounting Office (GAO) released a report (Critical Factors Underlying Successful Major Acquisition) highlighting the success factors in seven major IT systems acquisitions ranging from US$35 million to US$2 billion. The primary reason for success? The project managers were “actively engaged with the stakeholders.” With effective identification, communication, and coordination of major stakeholders, projects can be much more successful. The increase in success is matched only by the challenges of the stakeholder management process.
Develop the Requirements and the Data
Experienced project managers know that they cannot adequately plan out a project until they understand the requirements that define the final product. Even for small/medium-size projects, this is often an area where not enough time and effort are allocated. Scope creep is often identified in many research publications as a major cause of projects running over budget and behind schedule. Yet scope creep is often nothing more than having failed to gather, analyse, and freeze the requirements before the project is planned and the execution phase begins. Although there are some causes of scope changing outside of the project manager’s control, a primary source is inadequate requirements.
The initial set of requirements comes from the business. These are generally not true requirements in the sense that engineers think of requirements; rather, they are often goals to be achieved. These initial requirements are decided on by the business people to answer the question “What can we do that will give us the greatest financial benefit at an acceptable level of risk?”
This is where the disconnect often occurs that causes significant problems later in the EPC phase. Businesspeople think in terms of the ultimate goals and pay little attention to the technical requirements. The business just wants the construction to begin so it can start production and obtain revenues from the final operational facility. To the engineers and contractors, goals are insufficient to create a successful project. They need much more than goals to design the end facility. They need detailed technical information before they can even begin design work.
Change the Procurement Approach
Any form of firm fixed-price contract (FFP) is a poor choice for mega-projects. Locking in the schedule and budget when the future is highly unpredictable puts significant constraints on our ability to adapt to changes in the future environment.
Contracting strategy should be phased instead of fixed at the beginning. During the architectural, FEED, and engineering phases, an FFP approach can be utilized. However, in the actual construction phases, a cost-plus contract is more effective. The best contracting strategy will allow for flexibility to respond to external changes and will require more owner involvement in the construction stage.
This mixed approach is similar to that recommended by Merrow. As he states:
“Mixed contracting is a strategy that involved reimbursable engineering and procurement, including, in some cases, the procurement of some lump-sum package items, followed by lump-sum contracts of construction or fabrication by constructors or fabricators that are independent of the engineering and procurement firm(s). The construction lump-sum contracts can be a single lump-sum contract to a construction management organization or a series of lump-sum contracts by craft discipline.”
Economist magazine. (2013, August 3). The global oil industry - Supermajordämmerung. Retrieved from http://www.economist.com/news/briefing/21582522-day-huge-integrated-international-oil-company-drawing
Adams, C. (2015, July 26). Oil groups have shelved $200bn in new projects as low prices bite. Financial Times. Retrieved from http://www.ft.com/intl/cms/s/0/d6877d5e-31ee-11e5-91ac-a5e17d9b4cff.html?siteedition=uk
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Jergeas, G. F. (2008, May 28). Academic analysis of cost overruns on megaprojects. Internal presentation given to Mitsubishi.
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Merrow, E. W. (2011). Industrial megaprojects. Hoboken, NJ: John Wiley and Sons.
Muiño, A. & Akselrad, F. (2009). Gates to success, ensuring the quality of the planning. PMI Global Congress Proceedings—Amsterdam, The Netherlands.
Rittel, H., & Webber, M. (1973). Dilemmas in a general theory of planning. Policy Sciences, 4,155–169.
© 2015, Frank R. Parth
Originally published as a part of the 2015 PMI Global Congress Proceedings – Orlando, Florida, USA