INDUSTRY INSIGHTThought Leadership

The capital projects conundrum

Richard Verity, Partner and Steffen Fuchs, Senior Partner – McKinsey & Company  

CapEx matters. In 2019 the global value of capital portfolios amounted to USD 11.9 trillion, accounting for 14% of the world’s GDP. The next 10 years will see the Middle East execute nearly USD 4 billion of capital projects, around half of which will be committed to the energy and chemicals sector: new gas finds such as the Jafurah unconventional gas field in Saudi Arabia, and Qatar’s North Field expansion, will unleash a wave of new builds.

The COVID-19 pandemic may have slowed or even paused the progress of capital projects, but activity is expected to revive. To recoup lost time and funds it will be important to deliver projects on time and to budget. But if past performance is any indicator of future success, few projects will achieve that goal.

We analyzed over 900 projects across 12 different industries. The projects in our dataset reported cost overruns of 71% and schedule delays of 61%. Petrochemicals projects were no exception; the four largest US Gulf Coast projects we examined all came in with 40% delays and 30% cost overruns. When almost every other industry has improved productivity—for example, U.S. agriculture has improved productivity by a factor of 15 over 60 years, and large numbers of petrochemical plants operate beyond their name-plate capacity—why have capital projects failed to realize similar improvements?

Each of these projects is generally a one-off event, leading to owners and contractors being unaware of—or perhaps unwilling to consider—the project data that could enable the incremental improvements that yield benefits in operations. While there has been an increase in the amounts of data available, an increase in the ease of its analysis, and more software available to improve project management and delivery, digital has left capital projects behind.

We confirmed the potential value that could be unlocked through digital intervention in an assessment conducted with 2,400 companies. Four ‘constellations’ identified themselves: digital twins; 3-D printing, modularization and robotics; artificial intelligence and analytics; and supply chain optimization and marketplaces. We take a look here at four potential solutions that span three of these constellations, that demonstrate how digitally-driven capex analytics could indeed transform the projects launching in the next five years.

Benchmarks across cost, time, and productivity for a 3D project view

The first, Westney Capital Analytics, a boutique consultancy acquired by McKinsey in 2018, operates in supply chain optimization and market places, and has built a database of petrochemicals capital projects from across the world. The team employs in-house researchers who use published data supplemented with satellite imagery to refresh its insights, and monitor a range of production sites to understand timings between different phases. They also review supply and demand indicators for the contractor market, knowing that periods of intense activity lead inevitably to lower contractor productivity. These insights feed into an assessment logic that includes 75 different measures across cost, time, and productivity—benchmarks if you will—that allow us to analyze projects at every stage of the life cycle.

This three-dimensional availability of information helps to even-up the knowledge imbalance between owner and contractor. More importantly, insights trigger critical decisions; a contractor proposal above the benchmark may be an opportunity renegotiate, while a proposal below may risk overruns or change orders.

Better schedule creation saves time and money

Moving to the constellation, ‘data analytics and artificial intelligence,’ an example of a solution toolkit is offered by London-based nPlan. This technology addresses the challenge of schedule creation. They understand that schedules tend to be built by owners using the relatively narrow experiences of their teams. Long cycle times between the beginning and ends of projects compound the problem, as learnings rarely feedback to the original authors of the schedule or to those creating schedules for the future.

nPlan has created a database of schedules and added artificial intelligence to analyze project execution. Inputting a new schedule allows us to identify the criticality and uncertainty of particular tasks, predict the duration of different phases, and calculate the probability of meeting particular end-dates. These more precise estimations of time convert quickly into money saved. nPlan targets a 10% reduction in contingency budgets and a 30% reduction in claims. Its long-term aim is to make risk quantification a standard for project delivery, and could go a step further and make this approach a de facto standard of assurance for share-holders and financiers, as much as for the schedule’s immediate customers.

The digital advantage

The value of digital twins was already apparent before the arrival of the COVID-19 pandemic and its effects on how we work. Intuitively, we knew that a combination of 2D/3D/4D CAD, GIS, satellite imagery, and laser scans could improve both the quality of design and also execution against design. The new requirement to employ engineers who could not be deployed on site has accelerated adoption of digital twin technology. The Canadian company, Veerum, provides an example of a technology that combines digital twin visualization with a scheduling capability, allowing owners to monitor progress of the construction site through updates made to the digital twin. It can also become an information repository as objects are linked to their technical data sheets.

The Digital Control Tower from McKinsey is the fourth tool that can transform capital project excellence. The Control Tower is more than another piece of project management software. As well as containing the master schedule that offers a single source of truth for milestones, critical path, installation volumes, head-counts, and automated reporting, its clever architecture and performance measures allows users to perform root-cause analysis: if a high-level KPI disappoints, you can trace the cause of the problem(s) to the lowest level of detail.

Planning for success

Despite many examples to the contrary capital projects can deliver outstanding results, as seen at the MEGlobal’s Ethylene Glycol plant in Freeport Texas. On any number of measures the project outperformed its peers: it achieved pipe installation productivity of roughly twice the US Gulf Coast average; its weld rejection rate was over 20 times better than peers; and the project was completed eight months ahead of benchmarks for similar plants.

The results were achieved thanks to the key stakeholders fully understanding their roles and execution requirements; accountability was clear across all parties and the project was executed with jointly agreed discipline. The high-level path of construction was created by setting achievable goals based on previous projects, and performance was assessed daily so that corrections could be made immediately, rather than waiting for a weekly review to identify problems.

We believe that with the right investment in digital analytics projects in the Middle East can deliver similar results.