CEO Corner

My last column was about project budgets and schedules. Or more exactly, it was about how the Universe conspires to always cost more and be late, i.e. the Principle of Perversity. I wrote a bit "tongue in cheek", but was surprised by the response of those who read it. It seems that a great many of you feel the same way. I shouldn't have been surprised; after all, Murphy is the Patron Saint of Engineers.

A lesser known gentleman by the name of O'Toole is the Patron Saint of Project Managers. He was known to have considered Murphy an optimist. So what's the big deal? The observations of Murphy and O'Toole weren't new when Ramses was putting up pyramids in Egypt. Projects are just visual proof of the Laws of Thermodynamics, something that our instructors drummed into us back in school. If projects weren't tough, real estate agents would do them and we would all be working at the Tool Crib in Home Depot.

Projects have always been a mess. But some things are different. The fact is that our project world has changed in the last couple of years. To be honest, we got lazy. Worse, we got stupid because we got accustomed to the way things were. Now that sounds silly, because with few exceptions, life in the energy project world has been hard the past twenty five years. It has been a world of survival, not prosperity. The industry was forced to get lean. We had to shortcut everything if we were going to stay in business. We had to cut and then cut again. And we did.

We evolved fast and flexible ways to do things over the years. We developed short cuts and rules of thumb that allowed us to get things done in that hard world. Our people became adept at juggling multiple responsibilities and tasks. Anything that took away from a "bare bones" style was gone. But those lean methods, those short cuts, worked because there were some things that we could depend on. Life in the energy project world has been a certain way for the past twenty five years and certain things could be counted on to be true.

First of all, the cost of materials was pretty stable. Whether it was pipe, vessels or equipment, last year's cost was about the same that could be expected to be paid the following year. Almost any informal price estimate provided by a vendor was cut in price if you actually had a purchase order. Material delivery was "just in time". Overnight delivery did cost money, but almost anything was in stock somewhere. A project manager with money to spend could work miracles in delivering material to site. Construction craftsmen were available on an "as needed" basis. Whenever and wherever construction was to be done, there was a ready supply of experienced construction labor available with good first level supervision. Very little advanced planning was required to get a strong construction team in place. Because the balance of power between owner and construction contractor was heavily weighted toward the owner, pricing was always very competitive. The ready availability of good supervision and experienced craftsmen meant that drawings on cocktail napkins were good enough.

For projects that needed more than one or two technical people, there seemed an inexhaustible supply of "industry savvy" engineers and designers available. As project managers, we walked the earth like Clint Eastwood. Sure in the knowledge of our craft and our ability to get things done, we gloried in our "cowboy" ways. We used the term, "Engineering", to refer to that old fashioned methodical way of doing projects. "Engineering" included rigorous planning and scheduling, as well as tracking progress. It embodied the accumulated wisdom of bringing a structured approach to the doing of projects.

But our industry's thinking about "Engineering" embodied a slight modification of that old line from The Treasure of Sierra Madre, "Engineering, we don't need no stinking engineering!!" Even if we didn't believe it, our clients did; and woe to the service provider who didn't at least give lip service to that phrase. But even more importantly, serious woe came to the service provider whose rates and work rhythm didn't embody the truth of that phrase.

Looked at more objectively, projects over the past twenty five years were done in an environment that provided readily available resources and stable costs. Advance planning wasn't needed to assure either availability of the resources or the best pricing for those resources needed to do those projects. A generally high level of quality and experience base meant that the people utilizing those resources could do so effectively and with little training or direction. More importantly, traditional project management structure was an overhead cost that simply could not be supported in a subsistence project economy. Traditional project management structure evolved to provide a framework within which planning and control functions allowed for the consistent delivery of projects on budget and on schedule. But in a world of small simple projects being done in a resource rich environment, traditional project management was a large cost structure requiring a rigid organizational culture that provided a negative project advantage. Thus it was gone. Gone like a dodo bird.

Then things began to change. Surprisingly enough, I think thermodynamics has a take on that as well. First of all, predictability became a lot more important. Just getting it done at the least cost and fastest time wasn't enough any more. It was at least as important to accurately predict cost and in service date. Wall Street likes companies that hit their projections. Stock value, and executive pay, is much better if Wall Street is happy. Needless to say, this has a trickle down effect on capital budgets, projects and the criteria for their success.

But most importantly the starving, but secure and predictable world that we knew has flipped over completely. Starvation has been replaced with abundance, but predictability has been replaced with volatility. Costs are not predictable; deliveries are erratic and stretch out seemingly forever. Labor, both craft and technical, is in tight supply, and when available, often lacking in depth of experience.

The reasons for those changes are the much larger sums of capital available for the projects we do. But because the sums of capital are so much larger, so are the size and complexity of the projects that we handle. The good news is that Wall Street wants to give the energy industry a lot of money. The bad news is that the money comes with strings attached.

"Engineering" is not about engineering. If you will allow me a moment's digression here, the question about the service we provide, i.e. "Engineering", has never been about the engineering. That is, engineering defined as calculations or the proper application of formulae. It has been about the "Engineering" defined by project management; i.e. procurement, logistics, the amount of detail on the drawings, expediting, construction management practices, etc.

And it is now, at this point in time, when "Engineering" is needed. Projects are large and complex. Materials must be ordered far in advance. Revisions to the material order often restart the delivery clock at zero. Regular contact with the factory is necessary to stop someone else from pushing us to the back of the line. Construction labor is scarce and is often lacking experience in our industry. Construction supervision is stretched and needs to be directing novice craftsmen, not figuring out how to build something. They need detailed construction drawings that leave little to the imagination.

Our clients call on us to embrace those characteristics and provide that type of service that only a short time before had been cause for our rejection. We all feel that the old "Engineering" paradigm is not acceptable; not yet, perhaps not ever, but we need the results that its structure provided. We know that it isn't right for the new generation, but what we have done in the past is inadequate. We don't want to throw out the fast paced and flexible project structures that we developed from necessity over the past 25 years, but Clint Eastwood is no longer acceptable.

So where do we go? Our answer is to start with project managers. Our business is built around project management. A project manager is responsible for delivering successful projects. That hasn't changed, but they need different tools in this new environment. Not only do they need first class engineers and designers delivering quality work product, but they need forward looking management information systems.

Our goal, as always, is to produce successful projects for our clients. Today's environment requires most projects to have much more planning and logistical support. We can no longer count on the construction contractor to build from napkin sketches or minimal drawings. They can no longer count on having craftsmen that can interpret our meaning. They must be shown what to do, in detail.

We can no longer count on our vendors to rescue us when we forget something. If we don't think through fully and completely what we need during the engineering phase of the project, we won't get exactly what we need when we are building it. Back in our starving past, that didn't present a serious obstacle. We simply called the vendor and requested a change. They almost always had it, at the same price. If they didn't, someone else did, at a lower price. As you know, inventory is now empty.

Construction and material issues are serious, but they really only require a more complete and thoroughly engineered package than has been the industry's custom in past years. The major shortcoming we see today is the lack of effective Project Information Systems, which are the tracking mechanisms for budget and schedule. While clients tend to closely watch engineering costs and schedules, engineering costs are such a small part of a project budget that they have little effect on the overruns which are so common in the industry. What does greatly effect the project budget and schedule is the information developed during the engineering phase of the project.

Most project budgets and schedules at the beginning of the engineering phase are little more than educated guesses. While those guesses had validity in the past because of the reasons mentioned earlier, they are of doubtful validity today. At the end of the engineering phase, that educated guess has morphed into a number of fair precision. Very few of our clients track the evolution of that budget and schedule from a guess to something of substance.

We think that this is the missing element in today's project world. We think that this is a valuable service that we can perform for our clients. We encourage you to work with us to keep your projects from spinning out of control.

As always, I welcome your comments at b.groskopf@forerunnercorp.com.