Engineering Construction : Radical Change For 21st Century Prosperity

In 1829 Stephenson’s Rocket was cutting-edge but became not-fit-for-purpose due to changing market conditions & requirements, technological innovation and business demands – the world moved-on.

Engineering Construction Business

According to the US Heavy Construction index, as reported by Yahoo! Finance, contractors’ average profits in 2018 were 1.8%. This year, the same index is tracking a $400 million collective industry profit on $94 billion in revenue which is equal to 0.5% profit! What does 2020 hold? The supply chain is not doing much better, if at all.

Those that are doing better than the average should be grateful, but nobody can afford complacency – the contracting business environment is far too fragile. Contrast this with the owners’ experience of uncertain and delayed completion and start-up, substantial cost overruns and challenges in bringing industrial facilities up to and maintaining their full specified operational performance. Whichever way one looks at it the industry does not paint a pretty picture and is not attractive for existing and potential investors.

The Case For Radical Change

While many in the industry are not sitting idly by and hoping for better times to come but are considering and taking measures to improve their lot, the fact is that without radical change the engineering construction industry is not sustainable in the medium term. It is not a matter of tampering with the current models to get slightly better results, because even if these are achieved the ‘success’ will be short-lived. Most of the potential cost and schedule reductions have already been taken out of the traditional-model supply chain.

30-Year-Old-System Not Fit-For-Purpose

The concepts for project delivery and contracting methodologies that have served the industry for the last 30 years or more are no longer fit-for-purpose in today’s world. The notion that obligation and risk can be passed down to the lowest bidders in a supply chain of twelve or more levels and expect effective, efficient and economic performance back up the supply chain is misguided. The amazing thing is that this is nothing new – John Ruskin in mid-19th century England said of doing business “…if you pay too much for something you lose a little money, that is all, but if you pay too little for something then you run the risk of not achieving the thing you wanted…”. How often do owners not get the things that they wanted? … and why is this?

Recent “Successes”

Recent reports of some owner project successes in terms of delivery times and costs may suggest a turning-of-the-corner but when one digs a little deeper into the reported “successful deliveries”, these are not all that they are made out to be. And we must consider that those projects were delivered at a time of low project investment and a high level of resource underutilisation with the result that they attracted a lot of experienced attention. It is not too surprising that they went tolerably well.

Radical Change – What Does It mean?

So what does radical change look like? Stephen Mulva (Director, Construction Industry Institute (CII), University of Texas, Austin, TX) illustrates this well in his presentational slide OS2 Business Model (vs. OS1):

The triangle illustrates ‘OS1’ – ie., Operating System 1 which is the 30-year-old model, and contrasts this with ‘OS2’ which is currently being researched and developed under the auspices of Stephen and the CII. The striking thing is that the inefficiencies of the transactional arrangement in the multi-layered supply chain account for more than 40% of project development costs. The component parts of that 40% are illustrated in another of Stephen’s presentational slides;

It is to be noted that the sum of the figures listed amounts to more than 40%. This is because the CII researchers applied a formula to accurately reflect the overall effect of the individual items listed to arrive at the 41.43%.

But there is another benefit from removing this waste – shortening schedules. This means owners get the products from their new plants to market far quicker.

Tampering With The Old System Will Not Reduce The Costs or Schedule

The fact is that no amount of tampering with OS1 will reduce significantly the transactional costs because they are an intrinsic part of the 30-year-old system. Hence, the system must go and be replaced by something far more efficient – OS2. This will operate on an Open Sourced, Cloud Enabled Thin Platform specifically developed for this industry – currently there is not one. For more information on this follow the link to https://www.constructioninstitute.org.

What Evidence Is There That Such An Approach Works?

Stephenson probably had many nay-sayers when he developed the Rocket – this new-fangled technology will not catch-on – it won’t replace horses! How often has this been said in other contexts – telephone, airplanes, the “wheel”? But Stephenson’s cutting-edge technology in 1829 was soon overtaken by “events” and became not-fit-for-purpose.

Firstly, like it or not, we are living in the age of technology and have been for some while. If like me you are of a certain age, today’s rapidly evolving technology is a challenge! However, the issue is the present and the future, not the past. The industry is already embracing technological advancements cloud-based computing, BIM, digitalisation, artificial intelligence, drones, off-site factory fabrication etc. OS2 utilises these and goes much further.

But other industries are far more advanced in this area than engineering construction – shipbuilding, automotive and aerospace are but three examples. Engineering construction is a relative newcomer to technological advancements – why? Again, Stephen Mulva in a presentational slide illustrates Boeing’s approach to the 787 (Dreamliner) development:

It worked – the plane has been operational for some time and is the best thing in the air from an ordinary passenger perspective. Boeing set the tempo that others will have to follow. But think of what Boeing achieved in terms of engineering construction – 40% reduction in development costs and 33% reduction in schedule – and that is fact not myth! I know what will be said – manufacturing in a factory is quite different from construction work on site. Absolutely correct! but isn’t that why the construction industry is turning to maximise off-site factory fabrication and site installation – rather than on-site stick-built construction?

European Construction Institute (ECI)

As ECI Chair I am passionate about fundamental change to improve engineering construction, not just from the commercial business results and sustainability perspective for owners, contractors and the supply chain but also as an attractive career for the next generation of well-educated women and men – it is high time the industry is available to 100% of the population instead of 50%!

The ECI is committed to supporting the CII OS2 initiative. As part of this our focus is on productivity improvement across all construction sectors by working with and learning from organisations engaged in construction sectors in addition to engineering construction. Follow this link to see our approach http://www.eci-online.org/news/output-from-eci-member-forum-3-april-2019/

What can you contribute to and / or learn from this debate? Why not join in a see what prosperity in engineering construction in the 21st Century might look like. To learn more about ECI and its activities contact us via http://www.eci-online.org/.

John Fotherby – Chair, European Construction Institute
Chairman, Kingsfield Consulting International

Output from ECI Member Forum 3 April 2019

Thanks to those of you who were able to join us on 3rd April for our Spring Members Forum.  Please find the event report and links to presentations here. Please let us know if you have any questions or queries.

There are some immediate opportunities for you and your teams to engage in the following activities:

We look forward to actively working with all of you to advance this agenda.  Don’t hesitate to get in touch to share your ideas for how we can work together on this.

Engineering Construction Industry Training and Development Awards huge success

The seventh annual Engineering Construction Industry Training and Development Awards which took place on 11 October at the Bloomsbury London,celebrated the achievements and successes of individuals, companies and training providers across the engineering construction industry.

ECI was pleased to sponsor the Large Employer of the Year Award.

You can find a list of the winners here

Rethinking how capital programmes are delivered – report of the ECI conference on 3rd October 2018

Fluor hosted this conference in Amsterdam. There was a consensus with Paul van Weert of Shell who said that a step change in the way we do projects is needed to secure improvement of 30-50% in cost and 30% in schedule. Clearly that won’t be achieved by squeezing margins of suppliers but needs deeper collaboration and a radical transformation enabled by digital disruption. Andy Brown of ECITB presented on the latest approaches to collaboration and alliancing, and Stephen Mulva from CII in the USA presented on progress with their OS2 ‘Prairie Dog’ research programme in this area which is supported by ECI and which will seek to drive the digital disruption. You can download the presentations by clicking on the links below. A summary report of the conference is available below:

ECI Conference October 2018 report

Don Ward and John Fotherby presentation

Frank von Willert presentation

Andy Brown presentation

Stephen Mulva presentation

ECI roundtable for Owner Operators and Investors – 2nd October 2018

ECI and McKinsey facilitated a roundtable of owner operators in the engineering construction sector which was hosted at Shell’s headquarters in The Hague. Capital efficiency and the need to work together better as a sector to address it remains the number one issue for clients. Compared with ECI’s report 2-3 years previously, issues identified included: the crisis led to incremental improvement but not transformational change; competition for capital has increased while project performance has not; industry-level standardisation could eliminate a lot of waste but remains elusive; banks assert more control and drive risk further down the supply chain, increasing cost; and many companies still fail to capture lessons learned and transfer knowledge to new projects. The discussion identified a number of familiar themes for improvement, which require articulation of a clear road map to go from today to a different way of working, which would feature more collaborative contracting/alliances, harnessing the full power of innovation and digital technology to enable structural transformation of how projects are delivered, and sector-level standardisation of processes and requirements. A summary report is available here. You can view the presentations here.

View from the Chair: June 2018

The oil price is now hovering between USD 70 to USD 75 per barrel. Increases in the market price of other industrial commodities have also occurred. There seems to be a gradual upward trend in the award of new projects across several industry sectors including considerable interest in renewable energy, especially photovoltaic plants. So is this the time for rejoicing? I think not.

Firstly, there does not seem to be any significant increase in margins – if anything they are becoming tighter. EPC businesses are not sustainable on profit margins of 1% to 2%. At the same time project schedules are typically becoming shorter, contract conditions are often more onerous for contractors and they are being obliged to take on greater levels of risk if they want to win new orders.

Secondly, for owners and despite the “squeeze” on contract prices, in order to meet their investment needs the cost of plants remains too high, delivery times are unacceptably long and there is often uncertainty regarding plant start-up and performance – all of which can compromise the business case for the investment. Owner target reductions of 50% in investment costs and 40% in delivery times are not uncommon objectives. Research reveals that 40% of investment costs are in transactional costs. This is where attention needs to be focused to bring down the cost of plants, not the prices paid to contractors. Research also shows that delivery tiems can be reduced. However, there will be no improvement without radically changing the way capital projects are delivered.

In Engineering Construction there has been no real improvement in trading conditions since 2014…and they were not great before 2014!. Continuation of current trends will inevitably build up serious challenges in the future for owners, contractors and the supply network – the trading conditions are simply not sustainable. Many in Engineering Construction are well aware. More importantly, the current trading condition trends will not enable owners to achieve their price and schedule reduction objectives. For Engineering Construction to become healthy and sustainable in the medium to long term it is essential to fundamentally change how capital projects are delivered – ACTION TO BRING ABOUT THAT CHANGE NEEDS TO BE TAKEN NOW! The ECI event ‘Rethinking how capital programmes are delivered‘ in Amsterdam on 21 February 2018 confirmed this.

In the USA there is significant growing interest in and support from owners, contractors and supply network for CII’s Prairie Dog initiative led by CII’s Stephen Mulva. It is also gaining interest around the world. This initiative is designed to achieve three prime objectives: (1) significantly reduce investment costs, (2) substantially shorten delivery times to plant operational start-up and (3) create meaningful improvement in shareholder value for all stakeholders. The underlying philosophy is to deliver the plants the world actually needs at times when they are required by utilising more effectively the available resources to produce results that sustain and develop industry capability and performance. This effectively means delivering more plants with the present levels of resources.

In order to ensure the membership has access to and may take benefit from the research outputs from Prairie Dog the ECI has fully endorsed it and will take a small share in the special purposes company set up to develop the operating platform that will ultimately deliver the new approach to capital project delivery. Indeed, the CII is looking to ECI to take the lead in Europe to support and promote Prairie Dog in the research, development and operational phases. This is an opportunity not to be missed if Engineering Construction in Europe is to prosper and develop.

The findings from the ECI Amsterdam event on 21 February 2018 were followed-up in a subsequent event in London on 3 May 2018 which resulted in the formation of three groups to decide upon the research questions on the following topics;

  • Investors
  • Digitalisation
  • Sustainability

Presentation of these questions is expected by the end of June 2018 and research is expected to commence in September 2018. We need to form research groups comprising academics and industry professionals. This is where YOU and your ORGANISATION can actively contribute to and support the change that needs to take place to the way in which capital projects are delivered. CII and ECI can provide the forum but it is only industry that can make and implement the change. Please email eci@bre.co.uk to register your interest in participating in a research group and to obtain more details about the research programme and how you can contribute.

The ECI Annual conference will take place on 3 October 2018 and will be hosted by Fluor at their offices close to Schiphol Airport, Netherlands. The Conference topic will be Changing In The Way Capital Projects Are Delivered – Taking Action. It will be preceded on 2 October 2018 by a Client Round Table to be held close to the Conference venue. More details to follow in the next ECI Newsletter.

Recalling JF Kennedy’s sentiments – ask not what your industry can do for you but what can you do for your industry. Let’s work together to make the change that we agree is necessary for a prosperous and sustainable Engineering Construction industry. Your support and contributions are highly valuable and valued.

ECI is reliant upon the continuing support of the current membership and the growth in new members if it is to continue to provide opportunities for Engineering Construction to discuss, determine and implement significant improvement in performance and reward across the industry. It is not only membership fees that are crucial but also active participation in and support of ECI events and initiatives – join-in and help make the difference!

Challenging the mindset in nuclear construction: ‘Construction Factory Thinking’

The nuclear theme group of Constructing Excellence has published the first report in its Productivity Series. The report can be downloaded here.

In his Foreword, the chair of the group Adrian Worker writes:

“[Poor productivity] is not just a perception of the nuclear sector but of the wider construction sector… It needs to be urgently addressed by all involved at all levels if such perceptions are to be altered and greater value delivered to clients reliably and with confidence given to potential investors. It is a burning platform issue which is constraining the development and growth of the sector and therefore the national economy. Changes do need to be led by the major clients and without the creation of an environment where all parties can be successful nothing will change.

Productivity must be a high priority in any delivery model throughout the lifecycle. We also know productivity is an outcome of numerous factors including the environment and structures created by clients and the many inputs and constraints that impact the construction processes. There are views that client capabilities need to be strengthened, delivery models revised, the digital environment embraced and the other factors be improved. We are not seeking to address these aspects in this paper but to highlight the change in thinking required using the proven tools from other sectors could create a new mind set where productivity becomes the norm across all parts of the sector.”

Also in the Productivity Series, Simon Flint of Blu-3, another member of the Constructing Excellence nuclear theme group, has written a blog on the investors’ views of financing nuclear newbuild in the UK, highlighting the challenges including productivity improvement that must be addressed in the sector if it is to secure investment. The blog can be read here .

Report of the third conference of the #CEnuclear theme group
The third conference of the Constructing Excellence nuclear theme group was held in London on 10th May 2018. It addressed investors’ views of the sector, which are cautious based on the perceived high construction risk, and this discussion was followed by the launch of the first in the theme group’s Productivity Series. Read the event report here.

Rethinking Capital Delivery Projects – Moving Forward – ECI members Forum, 3 May 2018

Some 30 ECI members got together in London on 3 May to review the proposals developed at the event in Amsterdam on 21 February to support CII’s work programme “OS2” and to consider how best ECI should align to this programme to support the development of better capital project delivery.

John Fotherby, Chair of ECI, opened the meeting, with a call to action for ECI members to deliver meaningful action in the field of capital project delivery. The Executive steering Group had agreed that the existing direction groups should finalise their activities and publish the excellent data and outputs they have been working on, and then dissolve, unless they saw an opportunity to align to the new vision of OS2.

Stephen Mulva, from CII, provided an overview of the latest thinking on Operating System 2.0 (now named Prairie Dog).  Stephen considered how the industry could become more efficient through making better use of both capital and technology in order to unlock a better functioning industry based on a single industry business platform.

The meeting discussed the 16 considerations which had been identified by Stephen in a paper which had been previously circulated – see Appendix 1 – with much lively debate around the many issues and where Europe can really lead and deliver meaningful impact.

It was agreed that the following 3 areas would be focussed upon, with an outline research question to be developed ideally by mid-June.

Read the full report here

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Rethinking how capital programmes are delivered – Event Report

On 21st February 2018 over 60 high level representatives of ECI were joined by colleagues at CII at the offices of Fluor in Amsterdam to debate Existential Crisis – Rethinking how capital programmes are delivered.

Delegates were welcomed by John Fotherby, Chair of ECI and Arne Siewertsen, DM Project Controls & Estimating, Fluor our hosts for the day.  Paul van Weert, Shell Global EPC Manager and Bernd de Jonge set the context for a sector that needs to change.  Paul spoke of the need to halve the costs of capital projects to enable them to do twice as many projects with the same allocated budget, not through putting more cost pressure on supply chains, but through fundamentally rethinking the delivery model.  From a client perspective they want to see more continuity and learning across projects, greater standardisation and higher levels of collaboration.  Bernd made the case for making capital programmes more affordable, investable and bankable through better utilisation of capital.  He proposed that more R&D, greater use of digital technology and more collaboration were the keys to delivering projects more effectively.

There was significant agreement amongst delegates that the sector is facing an existential crisis, with 87% either agreeing or strongly agreeing.  On the topic of whether we need to rethink capital programme delivery there was overwhelming support in the room with 96% agreeing or strongly agreeing.

Read the full report here