January 2017

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Viewpoint: Reshaping the industry toward innovation, certainty and efficiency

It is no secret that capital costs of major projects have skyrocketed over the past decade. A July 2015 industry report noted that the average megaproject’s cost increase is 80% of its original value, with an average schedule slippage of 20 months.

It is no secret that capital costs of major projects have skyrocketed over the past decade. A July 2015 industry report noted that the average megaproject’s cost increase is 80% of its original value, with an average schedule slippage of 20 months.1

At first glance, these statistics, combined with the lower-for-longer oil environment, yield a poor outlook for moving capital investments forward in today’s oil and gas market. However, the lower-for-longer oil environment is a positive opportunity for owners and contractors to collaborate, reverse the trend and reshape the industry into one that is known for innovation, all while delivering certainty and capital efficiency.

Fig. 1. Extensive modularization can reduce required material quantities and craft hours onsite. Use of the 3rd Gen Modular Execution approach on the capture portion of the Shell Quest carbon capture and storage facility, helped reduce the capital cost by 30% from initial estimates.

Innovation

The same industry report noted that productivity in the construction industry has remained flat for decades, while productivity improvements in manufacturing have nearly doubled.

To improve capital costs and schedule delivery, we must innovate and challenge the status quo. Three years ago, Fluor created a business transformation and innovation organization to lead the company in working with clients to develop new ideas and technology that improve project execution and reduce costs. This organization is driving a culture shift throughout the company, and empowering our organization to be more creative and innovative.

However, innovation does not just stem from the top down. Our industry can also advance productivity and new ideas by fostering an inventive culture and encouraging employees to ask not why, but why not? On nearly every project, employees are developing unique ideas that can improve a project’s capital intensity through better design and project execution. With corporate encouragement, support and funding, employees are empowered to take these ideas from concept to reality, where they are then shared throughout the organization.

On a recent project, a project engineer noticed that crews may not be able to anticipate all safety hazards. This discovery led her to develop a new application called safety pin, which helps site leadership enhance safety by mapping critical activities taking place on project sites.

In the early design phase of another recent effort, the team had a small amount of water that required treatment. Rather than incorporating a water treatment plant into the design, the team developed a way to safely flare the water rather than treat it. This novel approach removed the requirement for a water treatment plant, reducing the project’s capital cost by millions of dollars and improving operating efficiency.

Encouraging our teams to be creative, fully explore new ideas and challenge time-tested practices enables project teams to improve capital efficiency and delivery certainty for our clients.

Delivery certainty

How do we shift the average 20-month megaproject delay into one where on-time delivery is the norm? Delivery certainty is best achieved with delivery control—that means having one organization focusing on delivering the complete project. This approach allows work to flow seamlessly between phases. Fabrication and construction teams can bring their expertise to bear from the project’s inception. Early evaluations of design and execution strategies by these teams have produced significant improvements in the engineered products delivered to the jobsite, and the design is easier to fabricate and construct.

In a traditional contracting model, engineering and technology teams are the only ones engaged in the early phases of the project. Contractors transition work and the associated responsibility at the end of each phase, which can create silos. This approach pushes unresolved issues to construction, which creates unnecessary delays and cost challenges in the most labor-intensive and costly project phase. With all resources focused on delivering the project with maximum predictability and capital efficiency at the outset, unresolved issues are mitigated before they occur, preventing unnecessary consequences.

An example of this collaborative approach is advanced work packaging, where construction activities are planned and sequenced in the design phase of the project. Details on materials, equipment, tools and schedule are generated during the engineering phase and are ready before craft teams are mobilized to the site. This approach was recently designated as a construction best practice by the Construction Owners Association of Alberta. Implementing this approach and investing in the early mobilization of construction and fabrication resources has yielded substantial productivity improvements on job sites, with Fluor achieving reductions in direct craft hours of between 15% and 18% on direct-hire projects.

This approach can be expanded with other better-build solutions, such as integrating scaffolding into front-end construction planning. Scaffolds are identified and designed into the 3D model during the detailed design phase, reducing quantities and minimizing at-grade scaffolding. Scaffold clips are installed in the fabricated steel when it arrives to the site, saving critical construction hours, reducing costs and improving safety.

Capital efficiency

Fluor has been working with a major oil and gas company to create a step-change improvement in project execution, making projects 30% cheaper, 30% shorter and 30% safer. The focus for all clients is not just on a reduction in contractor rates, but an improvement in total capital expenditure.

Collaboration must begin in the early phases, such as front-end engineering and design (FEED). While typically accounting for between 0.8% and 2% of the total capital cost, FEED is where owners have the largest opportunity to impact capital cost reduction. The design, fabrication and procurement decisions made in FEED shape a project into either one that will not go forward due to the high costs, or into one that will pass the company’s hurdle rates and deliver long-term value.

Fluor began collaborating with the client very early in the FEED stage of a project. Using our 3rd Gen Modular Execution approach to optimize the facility, we reduced the plot plan by 40% compared to a traditional design, lowering bulk material costs and the number of required onsite craft hours. Combined with process simplification, capital costs were reduced to 85% of the initial estimate. With integrated engineering, procurement and construction execution, the sanctioned cost and schedule has been maintained throughout the life of the project, fully meeting the client’s business objectives.

Another concept that holds enormous potential for the industry, but also requires early collaboration, is the zero-base execution approach. Beginning with a minimal design, the goal is to develop a safe, operable and maintainable facility, while unraveling and removing additional requirements and standards that typically do not provide a return on investment. In this approach, the project only delivers what is truly needed for the facility. We achieve a practical minimum design that optimizes capital expenditure and future operating expenditures. Teams utilizing this approach have seen a 33% plot reduction and a 20% tag reduction, while maintaining facility capacity.

With these approaches, our industry has an incredible opportunity to deliver innovation, certainty and capital efficiency for our clients to achieve the return on investment they need to move forward with high-priority projects. HP

LITERATURE CITED

  1. Changali S., A. Mohammad and M. van Nieuwland, “The construction productivity imperative,” McKinsey and Co., July 2015.

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