Construct io n Management Perf ormance Readiness Assessment for Managing Large Projects January 2008
Construction Management Performance
Readiness Assessment for Managing Large ProjectsJanuary 2008
1Copyright 2008 by ScottMadden. All rights reserved.
Contents
The Construction Management Landscape is difficult and getting worse Construction costs continue to escalate Global construction activities increasing, fuel continued demand-driven cost increases Competition for key construction resources (e.g., project managers, heavy equipment, etc.) to
complicate domestic / U.S. power projects Compressed project schedules as owners wait for environmental picture to crystallize
Construction Management Tables Have Turned Owners held the trump card previously when construction and supplier over-capacity was rampant;
now contractors and suppliers have the leverage Building (or Rebuilding) Construction Management Skills
Owners need to build (or rebuild) a number of construction management skills, both organizational and individual, to succeed in the new environment
How ScottMadden Can Help You
The Construction Management Landscape
3Copyright 2008 by ScottMadden. All rights reserved.
The cost increases are impacting all infrastructure projectsgeneration-, transmission-, or distribution-relatedand they will impact utilities in direct and indirect ways. For example, rising copper prices will increase T&D cable costs
This creates sizeable challenges for utilities. Infrastructure spending must continue. U.S. electric utility net plant is over $700 billion today, and CERA projects that $800 billion needs to be invested in the North American power industry over the next 15 years (excluding potential CO2 reduction-related capex). With a current market capitalization of just over $500 billion, investor-owned electric utilities have not faced this level of investment in 30 years
This spending will likely be in steadily increasing increments rather than a quick peak with an abrupt fall-off
Rate cases, which had been dormant for years, might proliferate. There is some risk of 1970s-style rate case pancaking if the environment is significantly inflationary
What Does This Mean for Utilities? Labor scarcity, especially skilled workers, will likely
drive up labor costs long-term, as firms increase wage rates to attract candidates to the construction trades. Indeed, skilled labor supply and demand curves crossed in April 2007
From January 2000 through January 2007, the Skilled Labor Index increased at a 4.1% CAGR; this rate was 4.8% between 2003 and 2007
While less dramatic than materials cost increases, labor wage inflation contributes significantly to construction cost increases, given labors cost as a percentage of total energy and utilities construction costs
Shop and fabrication costs have increased as well, compounding this problem
The world economy continues to grow at a brisk pace, led by China. This growth has sparked a significant run-up in construction inputs, both for commodities and equipment like transformers and turbines
Oil price increases have impacted materials transportation costs as well as inflation. Crude oil domestic prices during 2005-06 were on par in real terms with their highest levels in the late 1970s and early 1980s
From January 2000 through January 2007, the Material Price Index increased at a 2.3% CAGR; prices decreased from 2000 to 2003 but have since escalated at 6.8% per year
The United States is also hampered by lower currency valuation, so imported goods are now more expensive across the board
Manufactured equipment prices have risen dramatically in 2005 and 2006. Estimated price escalations for major power plant components were 13.0% in 2006 and 9.3% in 2005
Skilled Labor Vital to Construction Is More Costly, As Well
Worldwide Economic Growth Stimulates Construction Inflation
Sources: The World Bank; Edison Foundation; The Keystone Center; U.S. Geological Survey; SNL Financial; U.S. Bureau of Labor Statistics; U.S. Bureau of Economic Analysis; EIA; The New York Times; Platts Electric Utility Week (Feb. 19, 2007) (citing CERA)
The Construction Management LandscapeConstruction Costs Going Through the Roof
0%
10%
20%
30%
40%
50%
60%
70%
80%
Columns,Vessels
Line Pipe Exchangers Switchgear Pumps &Drivers
Compressor& Drivers
StructuralSteel
OtherEquipment
2003 2004 2005 2006
But commodity prices have spiked in recent years
And infrastructure equipment prices have increased
0%
1%
2%
3%
4%
5%
6%
3 MonthT Bill(BEY)
6 MonthT Bill(BEY)
1 YearBill
(BEY)
2 Year TNote
3 Year TNote
5 Year TNote
10 YearT Note
30 YearT Bond
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(
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Current
6 Months Ago
1 Year Ago
3 Years Ago
Long-term interest rates haveremained relatively stable
Source: SNL Financial
Source: Edison Foundation
U.S. Treasury Yield Curve(Recent and 6-Months, One Year & Three Years
Ago)
Annual Price Increase for Selected Equipment (By Year)
50
75
100
125
150
175
200
225
250
275
300
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
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Sources: BLS; Edison Foundation
Selected Materials Prices vs. General Inflation (Index: 1997=100)
Copper
Cement
GDP Deflator
Steel mill products
4Copyright 2008 by ScottMadden. All rights reserved.
Petroleum Industry Oil refiners are continuing to roll out plans for expansions and
upgrades 1
Similar projects have been canceled or delayed due to rising costs, labor shortages, and equipment delays
Seventeen expansion projects were planned in the U.S. from late 2006 through the year 2010
Maintenance projects were pushed backed due to delays of ordered equipment and the availability of construction contractors said Chevron Corp. spokeswoman Stephanie Price and there were labor shortages as skilled workers flocked to the Gulf Coast to work on repairs on facilities there. This created a backlog that continues today.2
Power Generation New nuclear constructions is ongoing in Europe, looks likely in U.K.
and France, and is being considered in the Netherlands and Canada while India and China have some of the worlds most robustconstruction programs3
China added 102 GW of capacity in 2006 and is expected to more than double that capacity by 20204
Many U.S. power generators are re-evaluating plans to build new generation as a result of estimated construction cost increases
Limited resources worldwide to provide equipment for nuclear construction programs
Construction Equipment Manufacturers Overseas heavy equipment sales by Caterpillar rose 35% in Europe,
the Middle East and Africa and rose 23% in the Asia/Pacific region Both Komatsu and Hitachi experienced a sales decline in North
America and noted that demand grew in Europe & CIS, China, Asia & Oceania, and the Middle East & Africa
Many industries across the globe are increasing construction activities, creating demand on labor, heavy equipment, logistics, engineered components, and commodities
1. Upgrade Plans Flow While Oil Prices Ebb, ENR, October 2, 2006 by Thomas Armistead with Beth Evans2. Refineries Summer Break, The Wall Street Journal Online, June 26, 20073. New Realities Bring About a Construction Climate Change, ENR, September 18, 2006 by Thomas Armistead with Peter
Reina and Dan OReilly4. Costs Hit Coal Building Plans, February 2007, Power Engineering by Amethyst Cavallaro
Construction Equipment Price Hikes
0.2%
2.3%
1.4%0.9%
1.5% 1.3%
3.7%
2.5%3.2%
6.9%
0%
1%
2%
3%
4%
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7%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
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Note: Year-to-year percent change for August
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National Average Labor Cost Index
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1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
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Labor for Heavy Construction and Reinforced Concrete Common Labor Craft Labor GDP Deflator
The Construction Management LandscapeGlobal Construction Activities Increasing
National Average Labor Cost Index
Construction Equipment Price Hikes
5Copyright 2008 by ScottMadden. All rights reserved.
1. From The Top 400 Contractors, Prosperity Allows Firms to be More Selective, ENR, September 24, 2007 by Gary Tulacz
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Current and future environment Growing backlog of project contracts at large EPCs Equipment availability, e.g., cranes, limited to none Longer lead times for materials and scheduling work Higher fuel prices increase material extraction/production
and transportation costs More delays (start and ongoing) are due to labor and skill
availability constraints (management, engineers, craft levels)
Construction productivity is declining, in part due to the scarcity of skilled labor
Contractors are experiencing:1 Opportunity to focus on projects where expertise
is possessed, owners are reliable and a reasonable return can be expected
Margins are on the rise with fewer fly-by-nightcontractors low-balling on bids
Freedom to turn down contracts with onerous terms or simply walk away
Difficulty in finding and retaining skilled and competent workers in trades and management
Material and equipment cost estimates are higher than original project plans due to strong demand and low supply
Demand is not just raising prices, it is making projects harder to start and complete on-time with implications on budgets
Compressed Project Schedules are the ResultCompressed Project Schedules are the ResultCompressed Project Schedules are the Result
Delivery Schedules
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20
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Air Co
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Motors
(>500
HP)
Exchan
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Colum
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Vesse
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React
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Pump
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Contro
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2004 2005 2006
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Motors
Exchan
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Colum
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Pump
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Contro
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2004 Shop Load Current Shop Load Anticipated 2006 Shop Load
Annual Backlog at Major EPC Firms
25000
30000
35000
40000
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50000
55000
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65000
2002 2003 2004 2005 2006
Year
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National Utility Infrastructure Cost Indices
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1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
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Total Plant-All Steam Generation Gas Turbogenerators GDP Deflator Transmission Distribution
The Construction Management LandscapeCompetition for Key Construction Resources
Delivery Schedules
Annual Backlog at Major EPC Firms
Shop Capacity
National Utility Infrastructure Cost Indices
Construction Management Tables Have Reversed
7Copyright 2008 by ScottMadden. All rights reserved.
DevelopmentDevelopment Scheduling Scheduling Execution Execution CommissionCommissionDesign Design CloseClose--Out Out
Detailed engineering design development
Long lead time materials ordering
Contract specifications development
Planning and materials supply
Assessing (detailed estimate information inputted into work management and scheduling systems)
Completion of work package
Short lead time materials ordering
Development of operations and maintenance documentation
Outage planning interface
Implementation/ installation
Permitting Work
performance monitoring
Work management/ schedule and cost monitoring
Weekly progress status reporting
Construction check and testing
Certification and testing of equipment operability
Operations and maintenance documentation delivery
Initial training completion
System punch-list items closed-out
Design drawings updated with field changes
Documentation closed-out
Creation of scope-level design for planning and estimating
Information structure [for work management, scheduling and cost systems] prepared
Development of project PEP
Contract strategy (make versus buy) development
Construction Management Tables Have ReversedProject Management Stages and Definitions
8Copyright 2008 by ScottMadden. All rights reserved.
RisksRisks
Scheduling Scheduling Execution
Execution
CommissionCommission
Design Design Clos
eClose--Out Out
Developme
nt
Developme
nt Pressure toStart Later
Pressure toPressure toStart LaterStart Later
Project Life CycleProject Life Cycle
Engineering design delays
Fabricator / equipment supplier queues lengthening
Acquisition of labor
Pressure toFinish Sooner
PressurePressure totoFinish Finish SoonerSooner
Competitive markets Cash flow Low reserve margins
Pressure to start later and end sooner affects every stage of large capital project development
Underestimated costs and under funded project
Inadequate contract specifications
Incomplete designs and design documentation
Adverse impacts on other projects
Schedule Compression Escalates Every Project RiskSchedule Compression Escalates Every Project RiskSchedule Compression Escalates Every Project Risk
Delayed permitting
Lack of commissioning time and plans
Delayed start-up Missing or incorrect
documentation
Construction Management Tables Have ReversedRisks of Project Schedule Compression
Building (or Rebuilding) Construction Management Skills
10Copyright 2008 by ScottMadden. All rights reserved.
The Need to Refocus on Construction Management Skills
Large capital projects have always been extremely complex and difficult to manage. Emerging conditions have increased the complexity through price escalations, lack of key construction management skills and schedule compression.
Construction management governance, through its eight key skills, provides the foundation for managing construction project risk well.
Regulatory Regulatory ManagementManagement
Financial Financial ManagementManagement
Stakeholder Stakeholder ManagementManagement
Quality Quality ManagementManagement
Process Process ManagementManagement
Workforce Workforce Performance Performance ManagementManagement
Work Work ManagementManagement
Project Project ManagementManagement
Performance Performance DriversDrivers
11Copyright 2008 by ScottMadden. All rights reserved.
Regulatory Regulatory ManagementManagement
Financial Financial ManagementManagement
Stakeholder Stakeholder ManagementManagement
Quality Quality ManagementManagement
Process Process ManagementManagement
Workforce Workforce Performance Performance ManagementManagement
Work Work ManagementManagement
Project Project ManagementManagement
Performance Performance DriversDrivers
Planning and scheduling Engineering and design Scope management Project controls Decision making
Job estimating Work package development Sourcing Materials management and
logistics
Staffing Productivity management Overtime management Contract management Work rule management Skills training Skills / job matching Safety
Work continuity Work method development Standardization Procedure management Process measurement Knowledge management
Environmental management Project performance auditing Schedule variance monitoring Work quality monitoring
Equity partner interface Intervener management Governmental relations Community relations
Project scoping Project financing Budgeting Project financial reporting Project approval hold points
Permitting and licensing Public accountability reporting Regulatory filing management Regulatory requirements
management
To address the challenges and mitigate risk exposure, companies should initially focus on rebuilding (or building) construction management skills in five areas
Building (or Rebuilding) Construction Management SkillsConstruction Management Governance Initial Focus
12Copyright 2008 by ScottMadden. All rights reserved.
Relies on formal management processes defined by Board and CEO
Addresses enterprise process needs comprehensively
Uses business objectives to drive decision making
Implements rigorous processes to increase owner comfort levels
Emphasizes business, financial, human capital and operations management enterprise focus (i.e., strategic)
Exhibits high-capability of decision tool infrastructure
Relies on formal communication, review and decision processes
Incorporates multi business unit process dimensions to integrate enterprise considerations
Uses project requirements to drive fact-based decisions
Focuses on owner key issues Emphasizes overall project and
business management program focus (i.e., tactical-strategic)
Exhibits moderate to high capability of decision tool infrastructure
Relies heavily on consensus Includes few sub-processes to
integrate enterprise considerations Relies on perceptions, less
empirically-driven Invites active and broad owner
involvement Emphasizes project cost and schedule
performance project focus (i.e., tactical)
Exhibits low to moderate capability of decision tool infrastructure
Description
When business complexity is demanding
With increased business management goal diversity
If balanced and strong buyer-supplier power market conditions exist
When business scale is expanding With need to preserve owner
interests When buyer-supplier market
conditions are balanced
When business scope is narrow With a small, tight management group When strong buyer-power market
conditions exist
Relevance
Owners define and drive decisions and reporting
Decisions grounded in enterprise value
Decision-making driven by information over dialogue
Sophisticated use of a full range of contracting options
Owners collaborate with suppliers to define requirements and protocols
Decisions reflect project economics Decision-making based on selected
fundamentals Appearance of alliance and
partnership arrangements
Reliance by owners on third parties to define requirements
Group decision-making predominates Decisions driven by project needs and
progress Decision making is less factor- or
empirics-based Prevalence of bid-buy practices with
some incentive-based contracting
Key Practices
MarketMarket--Based ApproachesBased ApproachesLimited Process ModelsLimited Process ModelsInformal Style and ProcessesInformal Style and Processes
There are three broad approaches to construction management governance
Building (or Rebuilding) Construction Management SkillsConstruction Management Governance Approaches
13Copyright 2008 by ScottMadden. All rights reserved.
80%
100%
0%
%
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Project Activities
Planning DetailedEngineering
Procurement Construction
Costs committed by planning and design decisions
Spend
100%
80%
Source: Construction Industry Institute
Project spend lags initial planning and engineering The greatest impacts on project success are developed during project planning and detailed engineering phases
Preliminary planning enables downstream project activities
Building (or Rebuilding) Construction Management SkillsImpact on Execution of Planning
14Copyright 2008 by ScottMadden. All rights reserved.
Effective governance practices establish the foundation for realizing the benefits of project management best practices namely cost leadership and process efficiency, according to the Construction Industry Institute
Mean Performance ScoreSource: Construction Industry Institute
Best Practice ValueBest Practice Use versus Quartile Performance
Building (or Rebuilding) Construction Management SkillsBest Practices in Project Management
Project Performance
4th Quartile 3rd Quartile 2nd Quartile 1st Quartile
Low Best Practice Use
High
High Impact
Medium Impact
Low Impact
Cost Savings
Low Impact
Medium Impact
Low Impact
Design / Information Technology
Project Change
Management
Pre-Project PlanningZero Accident
Technique
Team BuildingPlanning for
Startup
Constructability
Materials Management
Best Practice Use vs. Quartile Performance Best Practice Value
Schedule Reduction
HighImpact
15Copyright 2008 by ScottMadden. All rights reserved.
Lean construction is the adoption of the lean manufacturing technique pioneered by Toyota and Honda The key to lean construction is the decentralization of planning and decision making, managing for process, not speed, and the minimization
of process waste through ruthless standardization Constructability concepts of feed-forward process input are also included in lean construction Elimination of process variance within this methodology has seen >15% cost and schedule improvements in large projects such as airport
design and construction
Lean ConstructionLean Construction
Stage gating is used to control major project segments with approval to proceed to subsequent stages contingent on meeting each stages preset objectives
Stage gating technique is being pursued in some regions as a regulatory management tool Large projects employing stage gating also have seen >15 % project improvements with severe-duty construction efforts (e.g., Suncor at
Alberta refinery construction) benefiting from this technique
Stage GatingStage Gating
Up-front decisions have the most significant impact on downstream activities All upstream events (e.g., design, engineering, etc.) must be executed around construction and commissioning requirements >15% overall project cost and schedule improvements common with constructability implementation Applications of constructability implementation typically include severe-duty projects such as oil pipelines, power plant construction, shale-oil
refinery construction, etc.
ConstructabilityConstructability
Classic construction methodology, with centralized CPM scheduling and PMO-driven project management Production driven centrally through schedule adherence, tight work package preparation and strong push drivers for process efficiencies Speed of execution through efficient functional execution is the primary project throughput driver PMBOK methodology driven by optimizing performance along each element of the activity chain PMBOK is the most prevalent project management methodology in industry today
Project Management Body of Knowledge (PMBOK)Project Management Body of Knowledge (PMBOK)
There are several broad project management approaches in use today
Building (or Rebuilding) Construction Management SkillsProject Management Approaches
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QUALITY
SAFETYSAFETY
SCHEDULECOST
Regardless of the project management approach selected, the success criteria and levers available to construction project managers remain the same
Contract Management
Contract Contract ManagementManagement
ProcurementManagement
ProcurementProcurementManagementManagement
Project ExecutionProject Project
ExecutionExecutionProject Risk ManagementProject Risk Project Risk ManagementManagement
Decision DriversDecision Drivers
Building (or Rebuilding) Construction Management SkillsSuccess Criteria and Decision Drivers
17Copyright 2008 by ScottMadden. All rights reserved.
Contracts entered in a timely manner to minimize financial and project delivery risk
Change order management process clearly defined and rigorously applied
Web-based tools used to manage interactions with contractors in near real-time
Array of contracting approaches employed depending upon project type, scale, and risk profile
Contract ManagementContract Management
Appropriate hedging tools used to minimize price volatility exposure
Continuous evaluation of suppliers fabrication queues and lead-times to ensure on-time deliveries
Open, frequent communications with project managers, asset owners, and finance personnel regarding deadlines, resource availability and delivery, and the corporate integrated construction and maintenance plan
Supplier options expanded through appropriate identification and qualification processes
Procurement ManagementProcurement Management Project management process is clearly defined
with procedures and communicated as the expected process to complete project work
Projects are executed from start to finish by the same project manager
Project controls are used to monitor the project continuously and hold project managers accountable for results
Functional silos are not allowed to impede project structure and activities
Construction and maintenance schedules are integrated to optimize use of contractors and craft labor
Project ExecutionProject Execution
Each of the decision drivers has specific leading practices associated with it. Examples include:
Priorities and metrics for both the organization and project are fully aligned
During planning, likely project variances are identified and previous project actual activity durations considered
Performance standards are clearly identified and appropriate training provided before project initiation
Planning and milestone development processes are evaluated after each project
Significant time and effort are spent on stakeholder communications
Project Risk ManagementProject Risk Management
Supported bySupported by OrganizationalOrganizational ProcessProcess ToolsTools MeasurementMeasurement
Building (or Rebuilding) Construction Management SkillsProject Management Leading Practices
18Copyright 2008 by ScottMadden. All rights reserved.
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Best Practice Inter-Relations Defined
Maintainability & Operability Designing equipment layout to ensure that maintenance and operations tasks can be conducted efficiently and effectively
Constructability The optimum use of construction knowledge and experience in planning, design, procurement, and field operations to achieve overall project efficiencies and objectives
Front-End Loading Defining and incorporating strategic information into the project planning phase to influence overall project capital costs, schedule reworks, construction turnover to operation, andsteady state operations costs
Value Engineering the systematic effort directed at analyzing functional requirements of systems, equipment, facilities, procedures, and supplies for the purpose of achieving the essential functionality at the lowest life cycle cost, and consistent with meeting all performance requirements for reliability, quality, safety, etc.
Start-up and Commissioning The process of ensuring that systems are designed, installed, functionally tested, and capable of being operated and maintained to perform within design specification
TQM A strategy for continuous improvement performance in every level and in all areas of management
Process Hazard Analysis Ensuring safety of a facility by identification of hazards or problem areas that result from deviations from normal design operations
Prefabrication Preassembly & Modularization use off-site construction and assembly in controlled environments to minimizestick-building tasks
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Half of the key best practices are executed during construction
Possessing the skills and best practices sets the stage for achieving the project benefits
Building (or Rebuilding) Construction Management SkillsProject Management Best Practice Inter-Relations
How ScottMadden Can Help You
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QA/QC program, process and procedure development and oversight support
Project performance monitoring and performance improvement
Schedule and budget variance monitoring and remediation
Supplier quality and queue management
Quality Management
Work schedule integration and optimization Work methods Standardization and modularization Knowledge capture and transfer
Process Management
Work sampling and productivity estimates Overtime management processes Work rule management practices Skills sourcing and training activities Safety training materials and practices
Workforce Performance Management
Project estimating procedures and data sources Work package structures suitable for estimating and
construction Maximo and Passport management
Work Management
Hands on experience managing large capital projects and fossil plant outages
Major projects readiness assessment ScottMadden proprietary best practices
library
Outage planning and preparation Construction organization design Documentation hierarchy (management
model)
Strategic sourcing and supplier management
EPC contract management best practices Communication planning and execution Outage management augmentation QA/QC program augmentation Productivity sampling (wrench time
studies)
Post-project reviews, lessons learned, and knowledge transfer
Project roles and responsibilities Tools and measures for decision making and
progress reporting Skill training and organization depth Scope definition and control processes
Project Management
ScottMadden ScottMadden Demonstrated CapabilitiesDemonstrated CapabilitiesAssessment AreasAssessment Areas
Construction Project Construction Project Performance CriteriaPerformance Criteria
How ScottMadden Can Help YouGovernance Needs Assessment Approach
21Copyright 2008 by ScottMadden. All rights reserved.
Week 7Week 7Week 6Week 6 Week 8Week 8
3. Opportunity Identification Identify and prioritize gaps in risks and
potential mitigation alternatives Identify and prioritize improvement
opportunities Identify actions required to achieve
improvements Prepare high-level project plan for
next steps
2. Operations Assessment Conduct interviews Review available documentation Identify primary risks and exposure Review mitigation options and plans
already in place Review existing metrics/monitoring
mechanisms
1. Planning and Organization Finalize scope Identify data needs Schedule interviews and update
meetings
Week 5Week 5Week 4Week 4Week 3Week 3Week 2Week 2Week 1Week 1TaskTask
Six to eight weeks in duration, depending on finalized scope Interviews with key internal stakeholders (typically 15 20 interviews) Review of internal strategy, commitments, requirements, plans, reporting and other internal documentation Small project team comprised of senior level consultants working collaboratively with key client personnel
How ScottMadden Can Help YouSample Project Timeline Readiness Assessment
22Copyright 2008 by ScottMadden. All rights reserved.
Project PhaseProject Phase
Lessons LearnedLessons Learned
Outage planning and preparation
Construction organization design
Documentation hierarchy (management model)
Strategic sourcing and supplier management
EPC contract management best practices
Outage management
QA/QC program
Productivity sampling (wrench time studies)
Post-project reviews, lessons learned and knowledge transfer
Communication planning and execution
ExecutionExecutionPlanningPlanningTaskTask
Duration of consulting support varies depending on finalized scope Small project team comprised of senior level consultants working collaboratively with key client personnel
How ScottMadden Can Help YouSample Project Timeline Construction Management Auditing
Jere JacobiPartner
ScottMadden, Inc.Ten Piedmont Center
Suite 805Atlanta, GA 30305
Phone: 404-814-0020Mobile: 262-337-1352
Steve SandersPartner
ScottMadden, Inc.Ten Piedmont Center
Suite 805Atlanta, GA 30305
Phone: 404-814-0020Mobile: 770-490-8684