Zero changes on capital projects
is it possible?
The 2004 PMI Project of the Year, The Haradh Gas Project, instituted a “zero change policy.” Using a “lump sum turn key” approach, this $2 billion project was delivered ahead of schedule and with only 2% changes in cost. But is this zero change culture (ZCC) possible for all projects and all contract types? If so, what are the implications for the project manager and the team? What is required for such change management discipline?
Let's start with an example: the Haradh Gas Project. The $2 billion construction project was built on the edge of a desert surrounded by sand, 180 km away from the nearest outpost of civilisation. The scope was massive: to produce 1.6 BSCFD of natural gas and 170,000 BBL/Day of condensate. Everything had to be designed, brought in, and built—from the high voltage power supply to a residential camp. To transport the supplies, an airstrip that could land a Boeing 737 had to be constructed. And the environment was harsh: temperatures over 52° C in summer. When I use this example in class I poll my students to see what they think the project experienced in change orders as a percentage of total budget. The guesses are always high, as much as 300%. Imagine their amazement when I tell them that the change order rate was less than 2%, and the project came in six months ahead of schedule (Shaheen et al., 2003). One can see why it won PMI's 2004 Project of the Year Award.
But is Haradh just an amazing exception—one that can never be replicated again? What can project managers learn from it? Is this success possible for all projects and all contract types? If so, what are the implications for the project manager and the team? What is required for such change management discipline? These are the questions this paper will address.
What Does “Zero Change” Really Mean?
One of the key factors in Haradh's performance success was the team's decision to institute a “Zero Change Policy,” freezing the design process at three months before initiation (Shaheen et al., 2003). But what does a “zero change policy” really mean? Even the Haradh project had about 2% changes compared to total budget, so it can't really mean zero.
The purpose of such a policy is to make the goal very clear. Safety or late regulatory/compliance requirements would be the only exceptions. As the President of IPA, Inc. a benchmarking and project analysis firm says, “The goal of projects is not to have zero change. It is like what that much maligned baby doctor, Dr. Spock, used to say: If your goal is to never spank your children, you will probably spank them just about the right amount. Well, that is true with change as well. Our goal should be no change, but we will make changes, particularly in high-technology projects” (Merrow, 2002). Just as top performing oil and gas companies have a goal of zero safety incidents, the top firms have a goal of zero project changes.
Of the seven largest oil and gas companies by market capitalisation in 2008, Petrochina, ExxonMobil, Gazprom, Royal Dutch Shell, Sinopec, Petrobras, and BP, ExxonMobil's executives and managers have publicly commented on this topic. Morris Foster, who led ExxonMobil Development Company until being promoted in 2004 to the post of president of ExxonMobil Production and a corporate VP, is very firm on the subject. Of the 66 worldwide projects in his portfolio, one of the success stories was the Kizomba project, on which he was chief architect. Kizomba was divided into phases, with Kizomba B running a few months after but concurrent with Kizomba A. Foster pioneered the idea that they would “design one-build multiple,” i.e., one full detailed design would be created for a concept and it would be reused for other units with essentially zero changes between iterations. Foster says he was presented with around 100 new ideas that he could implement for Kizomba B but turned down all of them. “If I can build the same widget and save $400 million, tell me why I need to deal with these 100 ideas? If you are going to go with this concept you have to have the discipline of not changing. That is not to say you won't change at some point because you will. We have corrected many of the minor issues that we learned on A but have made no fundamental changes from A to B. But at least on Kizomba B there will be no changes. We did learn some things and from those learnings we will deal with those, but we will not change the design to do it” (DeLuca, 2004).
Mark Albers, who was promoted to Foster's role, has taken the same strong position. He says if you don't have change management discipline, the other six keys to project success: safety leadership, concept selection, technology, execution planning, contracting strategy, and project teams, will be useless. “You can have a great concept, a great execution plan, a great contractor, but change management is a main source of cost overruns. Engineers love to optimize and don't know when to quit—it takes a lot of discipline to freeze the design and move into construction. Clearly there needs to be a lot of care in selecting the right strategy, but we can't emphasize the discipline in managing changes. Invariably when we have changes we're reviewing, the project teams come in and say, “Well, the contractor is doing this and this and this. But over half the changes have been initiated by us. So getting the discipline in the organisation to freeze the design has been really important. You can't buy this change management discipline off the shelf. You can't watch a video. You can't go and get training. It's a culture way of working that's very difficult to instill but it is critically important” (Albers, 2007). Such statements set the tone at the firm and send a clear message: the team must strive for excellent performance to avoid changes in the first place.
Managers from ConocoPhillips, the third largest oil U.S. company, have the same view. A construction manager with the Alaska subsidiary of ConocoPhillips says, “None of us should shy away from it [change], deny it exists, or try to avoid it. Instead, we should embrace it and, most importantly, manage it effectively and early.” However, he adds that in the latter stages of a project, when the ability to change the result is the lowest and most expensive, we need to strive for a zero change culture (Owens, 2006).
What does it take for a zero-change culture? One vendor that services the oil and gas industry puts the concept (Exhibit 1) up front in its sales promotion literature (Stenersen, 2007). By embedding the concept in the sales cycle, there is clarity that the design will be frozen and when this will occur.
CA = Contract Award
BFGR = Basis For Global Release (Part of the System Engineering milestones)
MC = Mechanical Completion (The checking and testing of equipment and construction to confirm that the installation is in accordance with drawings and specifications)
Exhibit 2 lists seven oil and gas projects in which there was a strong focus to avoid change where possible, and control it when it occurred.
TLP=Tension Leg Platform FPSO=Floating Production Storage Offloading
Several of the projects above experienced one change, but it was dealt with as quickly as possible. For example, in Malampaya, there was a request to change from a “wet” to a “dry” system of condensate storage in the CGS base caisson. This occurred just as construction was about to start and was prompted by revised opinions regarding the levels of dissolved hydrocarbons in discharged water. Drawings for the revised design were issued just six weeks after the change order, and the lost time was rapidly regained because of a productive and motivated team, many of whom were local Philippinos.
The Chevron Typhoon project also had one noteworthy change. There was a desire to increase payload capacity by about 550 tons. To do this without modifying the existing design Chevron's EPCi contractor, Atlantia, utilized a new concept of extending the hull section by adding 18 feet (about 5.5 meters) of additional steel below the pontoons. It can be added fairly cost effectively late in the design stage without modifying the fit-for-propose design (DeLuca, 2001). The lesson to be learned from these examples is that a change can't be agonized over: the process must start with a rigorous evaluation, include a risk assessment, and have a timely resolution.
The question is sometimes asked as to whether selecting the right contract type is one of the keys to project success. If only it were this easy! The contract type allocates the risk among the parties. Successful contracts align the interests of both parties so that they work together as a team. In the examples above, different contract types were used on each project: Kizomba A and B (EPCMengineering procurement and construction management), Typhoon (reimbursable EPCi), Haradh (Lump Sum Turnkey), and Malampaya (EPC). The Ekofisk II project replaced a majority of the facilities in the original Ekofisk complex, and Phillips hired a project manager who supervised the work which was done by numerous subcontractors. Snorre B (Exhibit 3) used multiple contract types (Stenberg, 2004). There is no one right answer for all projects. The approach has to match the project. The details of the contract and the clauses it contains are extremely important in creating a high performance project. Exhibit 6 shows contractual clauses are one mechanism to control change orders.
How do you know a design is really ready to be frozen, stable, and unlikely to be changed? In the construction industry, a tool called the Project Definition Rating Index (PDRI) can be used to assess how well a project has been defined. The U.S.-based Construction Industry Institute (CII) developed this tool to facilitate the gathering of requirements for industrial and construction projects. Using a pre-designed questionnaire, the raters assess aspects related to the basis of project decision, the front end definition and the execution approach and rate them on their completeness. The result is an index that can be used to determine whether objectives have been sufficiently defined and adequate front-end planning has been done. PDRI questionnaires have been in used for construction project since 1994 and industrial projects since 1996. A Downstream Oil and Gas Questionnaire Version 1.0 was released in 2006. However, an upstream version is not yet available.
An index greater than 200 indicates the project is higher risk and that, to reduce risk, some areas should be defined further. A comparison of industrial projects found projects with scores less than 200 had better performance and fewer change orders than those with scores greater than 200, Exhibit 4 (CII, 2004).
A sample PDRI questionnaire for industrial projects is available at http://www.projectauditors.com/forms/c706pdr2_industrial_assess2.htm
Some companies use PDRI to look for risks or weaknesses in the lump sum EPC (Engineering Procurement and Construction) bidding, and use the questionnaire iteratively (Exhibit 5) (CII, 2004).
FEL = Front end loading
FEL 1 = Business planning and business appraisal
FEL 2 = Facility planning and scope development and selection
FEL 3 = Project planning and detailed definition
A rigorous approach like PDRI helps ensure that the objectives and scope of the project are well-defined as well as the design and planning. As these are the two areas of weakness in private sector projects (Merrow, 2002), adoption of PDRI would seem to be smart practice. Effective use of PDRI requires sufficient in-house technical knowledge. Companies who have outsourced too much may be unable to leverage PDRI and obtain its benefits. “The owner must have sufficient internal competence to control the front end of a project. And when I say control, I mean to really shape it. That means that you can't eliminate all technical competence from [an] organisation and still have good projects. You must have technical competence in order to be able to do your projects well (Merrow, 2002).”
Mechanisms to Reduce Change Orders
While we know you cannot prevent all changes on projects, there are ways to control changes throughout the life of a project. A 2006 survey of contractors, consultants, and developers was conducted in order to identify the effects of unforeseen change orders, and how they might be controlled (Arain, 2006). Although the survey focused on building construction projects, the results can be extrapolated for the oil and gas sector. Some of the mechanisms that were found to reduce change orders are shown in Exhibit 6, and grouped into typical phases for exploration and production (EP) projects.
Other Thoughts on Controlling Change
Another set of recommendations for the project manager to assist in controlling change come from a seminar held by the Major Projects Association in London, 2007. Contributions crossed industry sectors, with participation from space, oil and gas, nuclear submarines, highways, and construction. The seminar examined factors involved in the management of design from the viewpoint of the project stakeholders. Presentations were made on the ways in which design teams are brought together, organised and managed, the influence of contract types, and the importance of early and effective investment in design briefs and front-end engineering. Some of the seminar conclusions (Baxter, 2007) may provide proof for project manager of something he already knows to be true.
- There is no substitute for upfront investment in concept, feasibility designs and testing. Robust conceptual and front-end engineering packages are the key to defining project scope, budget and risk profile. By making sure the front end design is detailed and thorough helps to reduce scope creep. Freeze design progressively on a “late as possible” basis to reduce the risk of rework. The only criteria for design change should be factors such as safety and external circumstances. The project manager must also manage expectations very carefully during design stage to keep it under control.
- The project manager must create a climate in which all participants understand and commit to the project goals, and avoid the dangers of over-engineering and change. However, change will occur, and the systems and culture to manage it are important.
- Make arrangements to measure design maturity using a series of design reviews at appropriate stages in the design. Use the measures defined here in managing the project.
- Do not rely too much on quality control systems to protect engineers from their mistakes—engineers themselves have the responsibility for quality in their designs.
- Good design management demands attention to every detail.
- Ensure construction experience exists in design teams.
- Domain knowledge in the hands of the project manager increases the chance of success.
- “Intelligent owner” understanding, acceptance and approval of designs are keys to success.
- Invest in risk mitigation as a principle rather than risk assessment as an exercise.
A Zero Change Culture
There are parallels between the concept of a zero change culture (ZCC) and a zero incident culture. The concept has to be a core value, and not just a priority that can be changed depending on circumstances (Owen, 2006). The following questions might be asked to see if a company if really promoting a ZCC.
- Does management have a strong commitment to ZCC? Do they use their influence to promote it?
- Is ZCC part of every project?
- Are new employees oriented properly into the ZCC? How?
- Are field supervisors and managers promotions based in part on how well they did in promoting a ZCC culture and managing change when it did occur?
- Are contractors and subcontractors on board with ZCC? How are they oriented into the ZCC?
- Is root-cause analysis performed on late changes, and formal reports created?
- Do senior executives review these root-cause reports?
- Is action taken on these reports, or are they simply filed away?
The answers will indicate whether the culture is strong or still needs to be developed.
Summary and Conclusions
So what are the implications for project managers? They and their team have to commit to a goal of zero change once the project has reached that point. Everyone has to be on the same side pulling for that same goal, whether owner, consultant or contractor. This is an important factor in the contracting approach taken. A strategy that attempts to place all the risk on vendors is less likely to produce stellar results.
Mechanisms to reduce change orders need to be used throughout the project life cycle. This helps reinforce the concept of zero-change. Tools such as the Project Definition Rating Index (PDRI) should be used to ensure front end work is complete before the design is frozen. Action has to be taken to root out the causes for late change and counter forces that push for it.
Most importantly, the project manager should reinforce and promote a culture of zero change.
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© 2008, Joy Gumz
Originally published as a part of 2008 PMI Global Congress Proceedings – Malta