Back to Volume 2 | Summer 2017

Infrastructure Project Performance: There Must Be a Different Way

September, 2017

Abstract

In the United States, one of the few areas of political confluence appears to be around the need to address the country’s crumbling infrastructure. As priorities in governmental spending have shifted toward social objectives, investment in infrastructure over the past several decades has been woefully inadequate, not only in terms of expansion to keep pace with the needs of society, but also in terms of basic asset maintenance. While the construction industry should welcome this new focus on infrastructure investment, it must also deliver value for that investment as a clear priority, given the sheer scale of funding contemplated. Their recent track record for meeting project objectives is unacceptable.

With the stakes so high, and project performance at a historic low, it is imperative that the approach to the design and delivery of infrastructure change radically. How projects are delivered is as critical as the mechanism by which they are funded. Application of a robust Project Production Management (PPM) framework to the overall design and delivery process for infrastructure projects in the U.S. provides the means to ensure desired project outcomes and not result in “more of the same.”

If the industry’s track record is any indication, we need a different approach to ensure successful outcomes that are on time, on budget, every time.

Keywords: Project Production Management; Infrastructure; Construction Industry; Project Performance

Author:
John D. Carter, Chairman, Schnitzer Steel Industries, Inc., Advisory Board Member, Project Production Institute, jcarter@projectproduction.org

Introduction

Much has been written about the failure of the construction industry to advance its productivity performance in the last half century, whether in the U.S. or worldwide. A variety of factors are cited as reasons for this, mainly focused on the fragmented nature of the industry itself, the lack of adoption of information technology advances and the general nature of the relationships between owners and contractors [1]. Though many articles provide insight into the problems, speaking from my perspective as a former president of Bechtel Enterprises (a large construction services provider), the solutions typically offered are difficult to deliver due to four primary foundations that govern the construction industry (especially on large-scale projects):

  • Traditional legal overlay and contractual relationships
  • Regulatory frameworks and the role of government financing (particularly in the U.S.)
  • Political considerations
  • The fragmented nature of the industry

All these considerations combine to impede effective adoption of digital technologies and modern procurement techniques. Below are six main factors hindering the construction industry’s ability to effectively deliver projects:

  1. The client-owner and designer-contractor relationships have traditionally been considered adversarial, and thus contracts have been structured to reflect that assumption. Frequently, that motivates the owner to insist on control of design and schedule, while then insisting on increasing contractor liability when falling short of time and cost metrics. There is a serious lack of understanding on the part of owners as to where risk for a project truly resides. The reality is that it remains with them, not their suppliers. Performance incentives for the contractor are less common, and frankly, are rarely achieved. Inadequate attention has been given to designing proper means for identifying and resolving these areas wherein conflicts arise and providing ways to reduce their impact on the project. However, progress has been made on large projects in the private sector, usually involving major firms, and productivity there is markedly higher, although still at levels far below other industries.
  2. Traditional U.S. federal and state government forms of contracting are particularly clear examples of the adversarial nature of the relationship defined from the start, continuing throughout the contracting process. Bidding and procurement processes are not structured to encourage innovation nor the integration of the components that go into project delivery. Fixed-price design contracts that are separately negotiated tend to ensure incomplete design. Emphasis on the lowest cost (and incomplete design) often leads to claim opportunities, which escalates conflict and causes interruptions in work execution. Infrequent experience with large projects often leaves control in the hands of agencies unfamiliar with the demands of effective and productive project execution.
  3. The private sector is not immune to these drags on productivity. Again, the owner’s desire to build in contractual control often separates design from construction, resulting in the loss of flexibility and efficiency gained by integrating those processes. The use of design specifications following that separation philosophy discourages implementation of innovation through performance specifications (those which allow current technology improvements to provide lower cost alternatives), and “value engineering” to reduce costs during project delivery. Likewise, inadequate attention to dispute resolution techniques causes further conflict and wasted efforts in preserving opposing legal positions at the expense of progress.
  4. The impact of regulation cannot be overstated. If the U.S. government intends to embark on a massive infrastructure-rebuilding program, as seems to be the case, it must act to streamline the multiple approval levels and procedures that hamper and delay any major project today. Whether the issues are permitting, environmental compliance, public input, design review, etc., a means must be found to consolidate the various reviews to within a reasonable time frame – with final approval allowing uninterrupted project delivery (absent violations of imposed conditions to the approval). A comparison of the time frame today from project concept to actual groundbreaking, as compared to 50 years ago, makes the cost and impact on productivity obvious to any reader.
  5. Political considerations are especially detrimental to project efficiency and productivity. In the public sector, projects are routinely broken up into smaller packages, often with the idea that this will help ensure local content and favor voting constituents. Unfortunately, that compounds project management complexity and brings contractors with differing levels of experience and techniques into conflict. As a result, claims blossom. Lost in the discussion is the fact that even under EPC Turnkey contracts, the local contractors will normally have about the same level of involvement in actual construction activities. Unending public input processes also drive up capital costs through the addition of “nice to have” amenities, as well as the cost of financing these projects.
  6. Finally, the construction industry remains fragmented and resists consolidation through historical approaches to contracting, labor practices, and elements 1-3 noted above. For specialty contractors, there are relatively low barriers to entry. Small firms abound. Owner preference for bespoke design obscures the underlying potential for standardization. Aggregation of different functions in the construction process within individual contractors has occurred only in a limited number of large firms around the world – and even fewer of those conduct their business across the wide spectrum of infrastructure investments that are both necessary and already occurring. This fragmentation presents obstacles to any effort to integrate procurement activities, consolidate information technology systems, and / or standardize design features. It is also likely to persist. Only on specific projects, or with repeat clients, does the opportunity currently exist to implement integrated technology and procurement advances.

Given the obstacles, what are the chances for significant and transformative productivity improvements in the industry? To be sure, the opportunities are legion. A few options include:

  • Reconsider the traditional project delivery paradigm and approach major infrastructure projects from the perspective that they should be viewed in their entirety, as the temporary Production Systems they technically are [3]. Find ways to apply Project Production Management (PPM) techniques such as integrated procurement chains, design based on end-product delivery at lowest capital cost for expected quality output, standardized component specifications, and integrated design, engineering, and construction teams (or individual firms) which allow common information technology applications. Application of the Project Production Management approach provides an effective and proven technical basis for achieving this.
  • Restructure contractual frameworks to incentivize cooperation among all parties, integrate delivery teams and provide performance incentives to achieve financial benefit for the stakeholders [2].  Establish dispute resolution mechanisms that reward early discovery and resolution of conflicts. Focus on performance specifications to encourage innovation, and create an easy mechanism for design improvement during execution. Apply sensible and realistic risk allocation techniques that are related to long-term project rewards.
  • If financing for a project comes through a public private partnership arrangement, move to private procurement rules for the project. Absent change, it is difficult to conceive of a system less likely to lead to productivity improvement than most current forms of public contracting and procurement processes. Tailor the procurement process to encourage joint project teams and firms that can integrate EPC functions.
  • And, on this author’s wish list, advocate for a change in the regulatory framework governing major infrastructure projects. This would allow for a consolidated concurrent review and approval process by the various permitting agencies, within a designated time frame in which all reviews, public input, etc. would be conducted, and hopefully a restriction (to a high bar) on judicial interruption of the project delivery process while disputes are pending.

The construction industry has an opportunity to significantly benefit from the meaningful infrastructure investment that appears to be in the political offing. Much of that opportunity will involve public financing, or a combination of public and private financing. The public will clearly benefit from improving productivity in project delivery, and the industry must not pass up the opportunity to provide that benefit. There is a different way, but this will only be enabled by embracing change in the current contractual and project management model by applying advances in technologies and effective implementation of PPM to project delivery.

References

  1. F. Barbosa, J. Woetzel et al, “Reinventing Construction Through A Productivity Revolution”, McKinsey Global Institute, February 2017. Available: http://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/reinventing-construction-through-a-productivity-revolution
  2. UK Infrastructure Client Group, “From Transactions to Enterprises (Project 13)”, Institute of Civil Engineers, March 2017. Available: https://www.ice.org.uk/getattachment/disciplines-and-resources/best-practice/project-13-from-transaction-to-enterprises/ICE_REPORT_V6_22_03_17_Pages_Digital.pdf.aspx
  3. R. G. Shenoy, “My Project is a One-Off – How Does Project Production Management Apply?”, Journal of Project Production Management, June 2017, Project Production Institute.

About the Author

John Carter is Chairman of Schnitzer Steel Industries, Inc. He was previously President and Chief Executive Officer from May 2005 through December 2008, and Executive Chairman until December 2012. He is also currently a director of Northwest Natural Gas Company and FLIR Systems, Inc.

Between 1982 and 2002, Carter served in a variety of capacities at Bechtel Group, Inc., including: General Counsel, Executive Vice President and Director, and President of Bechtel Enterprises, Inc., (Bechtel’s finance and development company). In addition, he served as President of other Bechtel operating companies, both foreign and domestic. His duties included a lead role for Bechtel in the organizational and financial restructuring of the Channel Tunnel Rail Link in the United Kingdom, as well as managing the execution of other power, petroleum and civil projects for the company.

During his tenure as president of Bechtel Enterprises, Carter was responsible for the growth and eventual sale of U.S. Generating Company to Pacific Gas & Electric, the purchase of J. Makowski Company (an independent power developer), the creation of International Generating Company, its purchase from Pacific Gas & Electric, and later its partial sale to Royal Dutch Shell. Bechtel Enterprises started other joint companies during Carter’s presidency, including International Water Ltd., United Infrastructure Company, BCN Data Systems, EnergyWorks, Genuity, an airport development company and other companies involved in the finance and development of energy, transportation and telecommunications/data businesses. In the United Kingdom, he served as a director of London & Continental Railways and a director of Cross London Rail Links. He has served in various advisory roles, including consultant to the UK Director General for Railways, Aviation, Logistics, Maritime and Security Groups in the UK Department for Transport and with the privatization advisory group in Holland sponsored by the Dutch Treasury.

After his retirement from Bechtel Group, Inc., Carter was engaged in a consulting practice between 2002 through May 2005, focused primarily on strategic planning for transportation and energy initiatives across national and international businesses.

Prior to his tenure at Bechtel, Carter was a partner in the San Francisco based law firm of Thelen, Marrin, Johnson & Bridges. Carter is a graduate of Stanford University and Harvard Law School.