Major capital projects in heavy industry are facing an urgent need for improved outcomes. A recent survey of senior project executives found that, on average, projects overrun their budgets and schedules by 30 to 40 percent. Industry leaders recognize that this reality is destroying value and is not sustainable: more than 75 percent believe a change in large capital-project delivery is needed.
Capital Excellence Projects 5.0, a new method for delivering large capital projects, could enhance safety, reduce project delivery risks, and significantly improve project outcomes, with the potential of delivering projects 30 to 50 percent faster and at better returns. In a previous report, we shared that Projects 5.0 comprises six dimensions that act as building blocks for a better approach (Exhibit 1).
To successfully capture the potential of this method, project owners can start with the first dimension: establishing an ecosystem of partners to execute the other dimensions.
The concept of forming collaborative partnerships is not entirely new, and our research shows that early adopters of collaborative contracts have seen 15 to 20 percent improvement on cost and schedule on average, with some seeing more than 30 percent improvement. But many project teams struggle to collaborate successfully—or at all. Some in the industry suggest that such problems originate with the contract, but even with a collaborative contract in place, project teams struggle with performance transparency, have misaligned incentives, and may struggle to meet the end user’s needs.
To collaborate successfully, owners should consider fundamentally rethinking the ways they work with suppliers and contractors, forming an ecosystem of partners built on trust and for the long term (Exhibit 2). By doing so, they can harness new and innovative technology, encourage partners to build new capabilities, and enable the team to work in an agile way. An ecosystem of partners will also improve transparency and enable teams to better use data and share information, which fosters better project outcomes and sustainable partnerships.
We have identified five major shifts project teams can make to move toward an ecosystem of partners model, as well as an approach to help them make these shifts, ultimately allowing teams to bring significant increased value to major capital projects.
Five shifts to transform the collaboration model
Project teams struggle to collaborate effectively for a number of reasons. For instance, owners, contractors, vendors, and other players tend to keep each other at arm’s length and focus narrowly on minimizing cost and maximizing transfer of risk, a setup that adversely affects all parties. What’s more, the owners often structure project teams with limited input from the various players and, for the most part, don’t share decision-making authority (Exhibit 3).
Project teams also struggle to create transparency and share information in real time—and often don’t sufficiently invest in the technology that could allow them to do so. They frequently aren’t aligned on performance management and incentives, how to effectively resolve construction challenges, or even how to communicate with each other—which isn’t terribly surprising considering these teams often come together for a specific project without any history of working together. And contracts, which tend to be awarded to the lowest bidder, may be ambiguous or adversarial. All of these factors together create a culture of distrust, silos, and frequent project surprises.
To overcome these challenges and form a strong ecosystem of partners, owners can make five shifts in the way they approach collaboration.
Establish a long-term, collaborative, multiproject engagement
Owners or developers should consider establishing and leading a multiproject engagement, which allows project teams to define what drives value for the business and to work collaboratively to unlock it. These engagements work best when the portfolio of future projects on which to potentially collaborate and financial targets for those collaborations are clearly defined. For example, a developer could collaborate with the same engineering, procurement, and construction team and vendor network for the setup of three sequential projects. This type of long-term engagement can afford economies of scale and enable the team to invest in the infrastructure required to facilitate collaboration, including the platforms for sharing information.
For instance, a capital executive implemented a lean, integrated project delivery process for a complex project. He noted that this process meant that “one party not doing well is important to everyone. If electrical is not doing well, the mechanical contractor will bring it up and help fix it, since it is in everybody’s best interests.” The long-term, collaborative approach resulted in a reduction in spending and additional benefits, totaling a 30 percent benefit for the project.
Leverage complementary skills
Owners should consider selecting partners with skills that complement each other’s and their own. For example, while owners could try to develop capabilities such as building digital twins on their own, finding a partner that could provide this solution would allow them to deploy it much sooner. In our experience, with the right partnerships, projects have been able to launch this technology in as little as one to two weeks.
Align incentives and share risk
Project teams will likely want to move away from adversarial relationships toward a shared vision and goals and a commitment to all partners’ mutual success. For instance, a leading global car manufacturer set stringent technology, cost, and quality targets. The manufacturer then worked closely with suppliers to help them achieve these targets and rewarded the suppliers that achieved their goals with a larger volume of work. By taking this approach and working with suppliers to simplify production processes and improve manufacturing, the company reduced costs by 10 percent.
Build transparency and trust through a single source of truth
Project teams will likely want to base the partnership on a single source of truth and to strive for full transparency among project parties. Teams can align on specific goals related to value and establish a cadence using common digital platforms to track their progress. They should also consider codifying a system for sharing this progress, as well as information and learnings, across the ecosystem—for example, a digital twin and central control tower can help create a single source of truth and transparency.
The same auto manufacturer mentioned above shares all internal plans and manufacturing methods with partners and discloses all costs and margins in the partnership. It also involves key suppliers from the concept development stage of projects through to their completion—about two years earlier than is required. This openness and transparency have contributed to a 25 percent reduction in development time.
Align project objectives with external context
Teams will likely want to take into account the external context—such as the regulatory environment—to ensure that they’re able to efficiently deliver projects. For example, developing and curating a local supplier base and finding the right local skills to execute the project are crucial. Yet project teams often fail to plan ahead in this way or to make certain that the skills and capabilities they need are available.
Establishing an ecosystem of partners: Getting started
Successful collaborations can result in numerous benefits, including improvements in safety, quality, cost, and schedule. But teams will have to fundamentally rethink how they work together and how they create value to realize these benefits.
To focus their efforts in making these necessary shifts and establishing an ecosystem of partners that is set up for success, owners can follow a three-pronged approach.
Step 1: Develop a comprehensive partner selection process
The partner selection process can be fundamentally informed by the five shifts. That is, owners should consider looking for partners that are willing to enter a long-term engagement; have complementary skills; are willing to share risk and gains (understanding the trade-off between potentially lower gains in favor of a stable, long-term pipeline); and are open to forming a trusting, transparent, and collaborative partnership.
When trying to find the right partners that are open to these shifts, owners can consider taking a long-term view and ensuring that the relationship is worth investing in. They’ll likely want to find partners that can help them achieve strategic aspirations—for example, an innovative company that will help owners grow and develop internal capabilities. And they should consider moving past a lowest-qualified-bidder mindset to prioritizing fit, including cultural alignment.
Step 2: Construct a fair and transparent contract
A fair and transparent contract can lay the foundation for trust. One way to work toward a fair contract is by using a common contract across partners. Besides commercial compensation, which may differ across partners, the majority of the terms and conditions should be the same, including the scope of work, schedule, voting rights, and change order process.
Furthermore, owner teams can consider establishing incentives that reward all partners for creating value—for example, through a common profit-sharing pool for all players. Profit sharing can be in proportion to the scope of work and based on the level of project risk taken on by each partner. The profit pool can be projected based on the total estimated value, with an agreement among partners to also proportionally share any underruns.
One large oil and gas company, for example, was experiencing inefficiency and reduced profit margins. In analyzing its traditional approach, the company realized that contractual adversity had a major impact on project outcomes. It set out to rethink the way it engaged its partners, including sharing risk and rewards among partners. Following this adjustment, the team’s last project came in 23 percent under budget and six months ahead of schedule.
Step 3: Design a joint governance model
A collaborative partnership is typically governed by two boards: a project governance board and a project execution board. The project governance board consists of executives from all partners and is tasked with providing overall direction and strategic decisions. Typically, all partners have equal voting rights regardless of scope size, but the owner may also have a right to veto. The project executive board, consisting of members of all partners and led by the owner’s project director, makes day-to-day decisions on the project, such as resolving operational issues and design clashes.
By moving to an integrated decision-making model such as this, partners are able to efficiently resolve issues and capture opportunities, all parties have visibility into the process and core problems, and all—including designers, engineers, owners, and contractors—are able to weigh in on issues, ultimately allowing the team to land on better solutions that reflect everyone’s interests and expertise.
Building an effective ecosystem of partners isn’t easy—but the rewards are substantial. Large capital project teams that can build a foundation of trust, embrace transparency, and make projects mutually beneficial through a few critical shifts in the ways they work can expect immediate cost and schedule improvements—putting themselves on the path to the 30 to 50 percent improvements targeted through Projects 5.0. In an industry rife with challenges and ripe for reform, it’s an approach too promising to ignore.