Key Project Management Factors to Consider When Managing Renewable Energy Projects – Part 2
Posted July 27th, 2011
Several studies across multiple industries have examined the typical reasons for cost and schedule overruns when dealing with capital project management. There are less controllable factors, such as regulatory-driven changes and delays, licensing challenges and rising commodity prices; and more controllable factors, including project management and cost estimation. The root causes for cost and schedule overruns are often both structural and controllable.
A recent cross-industry study of capital project excellence and associated leading practices suggested that key drivers of project performance fall broadly into three categories: scope definition, cost estimation and project execution.
• Scope definition and project strategy activities play the most significant role in ultimately determining the success of project execution. Up-front planning and strategic issues will be increasingly important in new renewable energy generation, an environment where poor project performance can impair the lifecycle economics.
• Cost estimation has historically been one of the most challenging areas for large generation capital projects, regardless of technology. Historical construction cost reporting is often unreliable, and increasingly irrelevant, given the accelerating pace of change in renewable energy generation technology.
• Problems in project execution can be mitigated to a large extent through proper planning, yet scope changes and unforeseen events are inevitable. An expected future shortage of experienced and skilled construction talent in the United States, in both engineering and skilled trades, presents a significant risk in project execution.
Resulting research indicates that leaders in capital program management, across all capital intensive industries, are able to outperform others by systematically employing seven key differentiating practices:
1. Adopting a portfolio view to capital program management: Planning capital strategy over a multi-year horizon with a continually updated process allows for better response to changing market conditions, better alignment of capital project management processes with the organization’s strategy and better application of cost containment strategies such as developing long-term relationships with strategic suppliers and embedding complexity management in design practices.
2. Creating integrated teams instead of operating in functional silos: Migrating from traditional functional silos within capital project organizations to cross-functional teams will optimize installation, operation and maintenance. In new generation capacity construction, ensuring sufficient, early involvement of the operations team is particularly important.
3. Attracting, developing and retaining required skills and capabilities: A particular challenge across all capital-intensive industries in North America has been developing suitable career ladders for the most capable and ambitious technical staff. Success depends on planning resource continuity to manage scarce personnel on long-term projects and project portfolios.
4. Optimizing around cost rather than schedule: Understand the trade-offs between cost and schedule and use flexibility where available to take advantage of market conditions. Learn a lesson from recent behaviors in the oil and gas industry, where the peak in commodity prices in 2007 – 2008 drove many companies to execute projects “at any cost” based on schedule considerations alone, only to be faced with an overabundance of capital when commodity prices receded at the onset of the recession.
5. Managing complexity: Using standard/modular specifications and rigorous interoperability checks. Leading companies are resisting the urge to over-engineer what works well and are aggressively leveraging functional, effective designs time after time. Construction complexity can be reduced by adopting modular design concepts that limit both the activity and workforce required at the operating site during construction.
6. Realizing leverage through thoughtful procurement practices: Employing risk-based contracting strategies and unbundling expenditures to create leverage with narrow supply bases, manage cost and guard against escalation. Strategic, long-term relationships with key suppliers are a critical enabler of design troubleshooting and continuous improvement.
7. Predictive modeling to estimate contingencies: Use history and Monte Carlo simulations to estimate project budgets and establish contingencies. Poorer performing companies tend to use a single, consistent contingency value when preparing appropriation estimates. Leaders understand that uncertainties vary project by project and apply contingency factors accordingly. This is particularly important for renewable energy generation given that initial capital costs represent a significant majority of total lifecycle costs.
The challenge for developers of renewable energy generation capacity is to learn and adopt the lessons that other industries and organizations are offering. Like other asset-intensive industries, these companies require well-executed large capital investments and operational excellence to realize their strategic objectives.
