This post discusses unique project planning and management challenges associated with projects that are owned by single asset owners. Examples include power plants, large commercial facilities and process plants. These assets tend to be project financed using the single asset as collateral. The financing typically relies on revenue generated from operation of the asset. Hence, delays in achieving revenue generating status can be extremely problematic. Our conclusions and recommendations are based on decades of experience with many such projects.
Revenue generating facilities (e.g. power plants, chemical process facilities) are sometimes owned by a standalone entity. The design, engineering, procurement, construction, commissioning, startup and turnover of these plants and facilities can be particularly challenging for both owners and contractors. The planning, scheduling and execution of these requires attention to some unique and compelling factors.
Often these owners are financed using project financing that is based on financial analyses focused on return on investment, cash flows and other time-related concepts. In these situations, the owner’s balance sheet is limited and cash availability is the key. Further, these project management teams are formed from contract personnel with little or no infrastructure. Implementation tools for simple concepts such as project control processes, technical specifications or standards, and interface procedures may not exist.
The project management teams (owner) may consist of contract personnel. While individually competent and skilled, the “ad hoc” nature of such an organization is more characterized by individual skill sets and less by owner-oriented project management processes and infrastructure. Further, this sort of owner has no track record or reputation in the marketplace. This creates additional risk for the contractor.
Another compelling factor is the nature of financing and/or ownership. Projects that have public ownership tend to be particularly difficult for enlightened management if (and when) significant (planned or unplanned) disruptive events emerge.
Finally, these owners seem unusually averse to implementing changes that are to the contractor’s benefit (equitably). Both money and time are issues with these project financed owners.
Consequently, unique project planning, management and control challenges exist.
A key characteristic relates to “staying power” in the face of significant disruptions to the planned execution. Significant disruptions alter the financial projections and cash flows that underlie the financing and project basis. Events that result in longer project duration (say 6-12 months delay to completion) challenge the asset or balance sheet of these owners.
Examples of long term delays include serious design issues and major construction defects.
In one such case, a construction defect gave rise to a long term (3-6 months) delay. As the contractor responsibly proceeded with remediation actions the extended schedule created pressure on the owner’s balance sheet (cash position). The delay was aggravated and extended by a force majeure event which further impacted the owner’s staying power. Ultimately, the facility was liquidated through a bankruptcy proceeding. It is not apparent that any of the primary parties avoided serious and negative financial impacts.
In another such case, process issues (likely attributable to both the owner and the contractor) led to a prolonged commissioning and startup period/duration. Of course, during this extended duration, the owner’s cash position eroded over time. As above, the outcome was liquidation through bankruptcy.
In both cases mentioned above, another influence presented itself. Both facilities relied upon a common commodity as feedstock and the output of the facility was to be a commodity. In both cases, the feedstock and the finished product experienced negative marketplace changes during the (disrupted) engineering and construction period. Further, operating costs were problematic due to energy costs. These negative marketplace factors degraded the deteriorating project financial projects and, therefore, financing options. While hedges and other risk management techniques mitigated the impacts, the size and complexity of the delays were too much for the tolerance level of these owners.
Conclusions / Lessons Learned
The message and the conclusions in this regard is that unique and sometimes unorthodox planning and scheduling ways of working are necessary. These conclusions include:
- Despite best planning and intentions, major disruptions to time-related execution can occur. When project viability is heavily reliant on timely completion and achievement of commercial operation (hence revenue generation and debt service), schedule disruptions can be catastrophic.
- Contingency replanning – a process for replanning and restructuring the contract (and likely the project financing) should be in place or the contractor and owner should have a set of contingency plans. These plans must emphasize cooperation to formulate a mutually acceptable solution.
- Clear interface specifications – the parties must clearly differentiate responsibilities regarding project performance and scope of work. Owner involvement needs clear definition.
- Clear and definitive change provisions – the parties need to document how the contract price and performance period (duration) is to be administered. Further, timely resolution of differences is a necessity.
- Schedule maintenance – schedule development and updates are crucial in these time-sensitive projects. This includes owner cooperation regarding updates and status regarding activities that are owner responsibility.