Capital Efficiency

CAPITAL
EFFICIENCY
PULL ALL THE LEVERS
Bob Prieto
© 2014 by Bob Prieto, Fluor
All rights reserved. No part of this publication may be reproduced or

distributed in any form or by any means, or stored in a data base or
retrieval system, except as permitted by Sections 107 or 108 of the 1976
United States Copyright Act, without the prior written permission of the
copyright holder.
Printed in the United States of America

First Edition
i
Acknowledgements
Capital Efficiency: Pull All the Levers reflects my continued research and
work on those attributes of large engineering & construction programs that
drive success as well as those which present challenges to owners. This
work builds on my earlier works on program management and life cycle
analysis, focusing on some of the ways an EPC company can help the owner
meet needs imperative to improve capital efficiency.
This book exposes readers to the notional underpinnings of a “business basis

of design” and its importance in achieving capital efficiency. The impacts of
delay and the planning fallacy are explored and some new thinking on the
linkages of RAM analysis and supply chain design to capital efficiency
explored.
In many ways, this work would not have been possible without the
encouragement of clients I have had the opportunity to work with and my
colleagues at Fluor.
CMAA’s continued support of my professional efforts is welcomed and

hopefully this work will further contribute to the industry and CMAA’s
professional goals.
This book is published with the full permission and encouragement of Fluor
Corporation. Opinions expressed in the book are those of the author and not
Fluor Corporation. Each of the chapters provides a basis for a value creation
topic reflecting the company’s practice and commitment to delivering value
to our clients through all we do.
Select graphics throughout this book are © Fluor Corporation and are
reprinted by permission of Fluor Corporation.
ii
About the Author
Bob Prieto
Senior Vice President

Fluor
Princeton, New Jersey, USA
Bob Prieto is a senior vice president of Fluor,

one of the largest, publicly traded engineering
and construction companies in the world. He
focuses on the development and delivery of
large, complex projects worldwide. Bob
consults with owners of large engineering & construction capital
construction programs across all market sectors in the development of
programmatic delivery strategies encompassing planning, engineering,
procurement, construction and financing. He is author of “Strategic Program
Management,” “The Giga Factor: Program Management in the Engineering
and Construction Industry” and “Application of Life Cycle Analysis in the
Capital Assets Industry” published by the Construction Management
Association of America (CMAA) and “Topics in Strategic Program
Management” as well as over 500 other papers and presentations.
Bob is a member of the ASCE Industry Leaders Council, National Academy

of Construction and a Fellow of the Construction Management Association
of America. Bob served until 2006 as one of three U.S. presidential
appointees to the Asia Pacific Economic Cooperation (APEC) Business
Advisory Council (ABAC), working with U.S. and Asia-Pacific business
leaders to shape the framework for trade and economic growth and had
previously served as both as Chairman of the Engineering and Construction
Governors of the World Economic Forum and co-chair of the infrastructure
task force formed after September 11th by the New York City Chamber of
Commerce. Previously, he served as Chairman at Parsons Brinckerhoff
(PB), one of the world’s leading engineering companies. Bob can be
contacted at bob.prieto@fluor.com.
iii
Other Works by the Author
Strategic Program Management

CMAA
ISBN 978-0-9815612-1-9
July 24, 2008
Topics
in
Strategic Program
Management
Topics in Strategic Program Management

ISBN 978-0-557-52887-5
July 2010
Bob Prieto
The GIGA Factor; Program Management in the

Engineering & Construction Industry
CMAA
ISBN 978-1-938014-99-4
2011
Application of Life Cycle Analysis in the Capital

Assets Industry
CMAA
ISBN 978-1-938014-06-2 (eBook)
ISBN 978-1-938014-07-9 (Print)
June 2013
iv
Table of Contents
Chapter 1 The Capital Efficiency Imperative
Chapter 2 Schedule
2.1 Owner’s Readiness Index
2.2 Perspective on the Cost of Delayed Decision Making in
Large Project Execution
Chapter 3 CAPEX
3.1 Addressing Capital Efficiency through a Business
Basis of Design
3.2 Candidate Strategies to Reduce Risk
Chapter 4 OPEX
4.1 Elements of Operations & Maintenance Basis of
Design(O&MBOD)
4.2 Role of a Sound Asset Management System
Chapter 5 Plant Availability

5.1 Flexibility as an Element of Capital Efficiency
5.2 Reliability, Availability& Maintainability
Chapter 6 Inventories
Chapter 7 Opportunity Analysis
Chapter 8 Summary
Chapter 9 References
v
Appendices
Appendix 1 BODX Checklist – Construction Basis of Design
Appendix 2 BODX Checklist – O&M Basis of Design
Appendix 3 Managing the Planning Fallacy
vi
Headlines
“Speaking to investors today, new Shell CEO Ben van Beurden updated on
the company’s priorities: improving Shell’s financial results and achieving
better capital efficiency, as well as continuing to strengthen operational
performance and project delivery.”….January 30, 2014
(Vale capital spending) “in 2014 will show a decline for the third year in a
row. This reflects the greater focus on capital efficiency, which entails
among other things pursuing shareholder value maximization through a
smaller portfolio comprised of projects with a high risk-adjusted expected
rate of return.”
(Rio Tinto) “to scale back capital spending to bolster economic

returns…..Iron Ore growth pathway optimized at a lower capital intensity”
(Dow) “Our focus on operating and capital efficiency gives us flexibility to

respond to changing economic conditions while also enhancing our
productivity and profitability.”
(Merrill Lynch on Exxon Mobile) “we view relative changes in capital

efficiency and free cash flow as the key determinants of value.”
1-1
What is Capital Efficiency?
In simplest terms capital efficiency (sometimes referred to as capital
intensity) is about getting the biggest bang for the buck.
There are a myriad of definitions used when describing capital efficiency.

The basic formula for calculating capital efficiency involves dividing the
average value of output by the rate of expenditure for the same period of
time. This may be considered over an asset’s life cycle or for more discrete
time periods in order to see if capital efficiency is improving or degrading
over time.
A common definition used is Return on Invested Capital, or ROIC, defined

as Net Operating Profit After Taxes (NOPAT) divided by Invested Capital.
What are the Components of Capital Efficiency and Who and

How Can they be Influenced?
Capital efficiency as measured by ROIC can be described as:
1-2
Each of these terms offers opportunities for the owner and his principal
capital facility provider (such as his engineer constructor or EPC) to add
value, improving the capital efficiency of the asset.
Let’s look at each in turn.
Improving Operating Margins

Operating margins are defined as:
Where, NOPAT is:
Earnings Before Interest and Taxes (EBIT) =
Revenue – Operating Expenses (OPEX), including feedstock and energy

costs
Less
Non-operating income, losses
Less
Income tax provision
Less
Interest expense x tax rate
Plus
Non-operating income, losses x tax rate
1-3
And, the sales denominator is revenue from the sale of asset output which
can be defined as:
(Function of plant performance and availability)
The asset owner can directly influence Operating Margin through:
• Premium pricing (relative to the market level set by supply and demand)
for product as a result of marketing, packaging and distribution
strategies
• Sales to absorb the maximum efficient capacity of the plant
• Operating practices focused on predictive and preventative maintenance
(may be down in conjunction with his EPC)
• Control of OPEX costs such as marketing and sales
The asset owner can also influence Operating Margin through the actions of
his EPC through:
• Interest expense (through CAPEX schedule which may play through to

asset interest charges associated with the selected asset capital structure)
• OPEX and availability driven Capacity Factor [through maintenance
and turnaround strategies, quality design (potential to up-rate or further
debottleneck a plant), required feed stock levels and inherent energy
efficiency and incorporation of renewable energy and storage solutions]
1-4
Invested Capital Turnover
Invested capital turnover is defined as:
Invested Capital Turnover = Sales/Invested Capital
Where Invested Capital =
Operating Working Capital (current assets (includes inventories) – current

liabilities)
Plus
Net Property, Plant and Equipment (PPE) (book value of property, plant and
equipment, net of cumulative depreciation)
The owner’s influence over pricing and sales level is identical to that
described with respect to Operating Margins in the previous section.
The owner’s EPC has an opportunity to influence:
• Plant availability (influencing sales levels)

• Required inventories (through design and supply chain)
• Net Property, Plant and Equipment (PPE) through associated capital
costs (CAPEX)
1-5
Strategies to Improve Capital Efficiency
The balance of this book focuses on the five areas identified as within the
influence of the asset owner’s EPC, reordered as:
• Schedule
• CAPEX
• OPEX
• Plant Availability
• Inventories
The other levers associated with capital efficiency include:
• Premium pricing
• Sales level (plant capacity)
• Operating (O&M) practices
• Control of other operating costs such as sales and marketing
and are not addressed further in this book.
The owner’s EPC can drive process improvement along the five principle
opportunity areas identified to improve capital efficiency to the extent that
he is enabled by the owner’s organization and contract form.
This is key, since best of class capital efficiency may require change
contracting and project execution practices from what the owner has
traditionally utilized. Examples may include life cycle contracting, increased
use of fabrication and modularization, and utilization of the EPC’s supply
chain which is tuned to the delivery of capital assets versus the owner’s
product profile.
These five areas are each covered in subsequent chapters.
1-6
Schedule reduction and importantly, schedule adherence are key elements in
capital efficiency. Projects which suffer from poor schedule performance
often trace their roots to:
• Lack of readiness by the owner’s organization to undertake the project

• Inadequate appreciation for the value of time and the associated cost of
delay
• Being victims of the “planning fallacy”
Other schedule influencing factors during the CAPEX stage will be

discussed in Chapter 3. In this chapter, we will focus on owner’s readiness
and the cost of delay.
2.1 Owner’s Readiness Index

Major projects today often succeed or fail based on the readiness of the
owner’s organization to undertake those projects. In engaging with owners
over the course of multiple large projects, it becomes clear that there are
certain elements of readiness which must be in place in order to promote
project success. In this section, I will briefly touch upon some of these
elements and suggest that a formal evaluation and scoring by owners may
prove to be a useful tool to assess their progress in moving toward project
execution and achieving the desired levels of capital efficiency.
The considerations described are to some degree separate and distinct from
an assessment of the readiness of the project itself. This project development
readiness assessment should be similarly conducted utilizing tools such as
the Construction Industry Institute’s Project Development Readiness Index
(PDRI). The Owner’s Readiness Index (ORI) described here is designed to
2-1
more specifically look at issues within the owner’s organization, its
processes and level of shared understanding.
The ORI is structured to consider major questions in the following areas:
• Owner readiness with respect to an individual program and associated

decision frameworks and processes
• Program objectives and criteria
• Program planning and execution approach
We will look at each of these aspects in turn and conclude with a suggested
instrument for use in assessing an owner’s readiness to undertake a major
project.
Owner Readiness with Respect to Program and Associated

Frameworks
The number one source of program underperformance, particularly at the
earliest stages, is the owner’s failure to articulate and clearly communicate
the so called strategic business objectives of the program. There are several
dimensions to this shortcoming including:
• Poorly defined or articulated vision, mission and top level objectives

and, importantly, associated metrics of the owner’s organization. As
fundamental as it may seem, the assumption that “everyone knows,” is
just that, an assumption.
• Strategic Business Objectives of the program must be clearly spelled out
and, importantly, mapped to the owner’s top level objectives. This
mapping is important since it establishes a program’s relevancy and
importance in the owner’s organization. Sometimes these SBOs may be
referred to as program or project business objectives. Experience has
shown that even clearly articulating these SBOs is not enough; they
must also be continuously communicated.
• SBO Key Performance Indicators (KPIs) must be established and linked
clearly and tightly to the owner’s top level objectives. This notion of
cascading objectives is essential to program success and owner
organizations which have not clearly thought this through run the risk of
competing, or even worse, contradictory objectives.
If clearly defined strategic business objectives and clear and continuous

communication are the first element of owner’s readiness, then a well
thought out, supported and tracked strategy is second. The owner’s strategy
2-2
for program implementation must demonstrate strong linkage to SBOs and
be directly focused on their achievement.
Strategy must be supported by transparent and substantiated top-level

business assumptions. In organizations not sufficiently ready to undertake a
major project, it is not unusual to see a lack of a shared understanding of the
program’s context. Specific assumptions and context defining factors that
the owner’s organization must be cognizant and comfortable with include
those with respect to:
• Program demand related forecasts

• Factors related to program revenues
• Owner’s financial condition
• Resources available to the program
• Competing programs and associated resource requirements and timing
• Assumed changes to law, regulation or policy impacting owner and
program and anticipated timing
• External environment
• Operating strategy and required lifecycle performance
• Owner’s risk posture and philosophy
Managers of large programs must do more than just be aware of the

assumptions made in strategy development; they must track them
throughout the program lifecycle. One of the greatest challenges large long
duration programs face is what I refer to as “assumption migration.” The
owner’s awareness of the assumptions he has made and his focus on
tracking their migration and, importantly, understanding the implications of
their trajectories is an essential element of owner readiness.
Execution frameworks greatly impact program success and as part of

readiness activities the owner’s organization must have a secure handle on
several execution impacting frameworks and processes that include, but are
not limited to:
• Business model, scenarios and relationship to program

• Prerequisites for external approvals
• External approval requirements, timing and likelihood
2-3
• Prerequisites for owner’s executive approvals and linkage to a formal
stage gate process, including clarity and comprehensiveness of stage
gate requirements and processes; stage gate approvals, authorities
granted, resource commitments and constraints; and approvals matrix
• External prerequisites linked to stage gates, including regulatory
approvals required, process clarity and timing, including safety case
requirements and process for property acquisition
Risk and opportunity identification, assessment and management are key

dimensions of an owner’s readiness to undertake a major program. Owners
must have identified major risks to the owner and his business model, as
well as to program strategy and any risk mitigation strategies. Importantly,
the owner must have in place the ability to conduct this risk and opportunity
identification, assessment and management program throughout the entire
program period.
Readiness is not just about an initial upfront assessment but rather must also
include a systematic approach to maintain these assessments current and
refresh them when circumstances change. While there will be a natural
tendency to focus on risks, well prepared owners are similarly focused on
opportunity analysis.
Best of class readiness often includes a clearly focused element of risk and
organizational preparation that provides for both owner and program
resilience.
The owner’s organization and its acceptance of its changed roles in large
program execution are key elements of program success and an early
assessment of the organization’s readiness to adopt this changed role is a
key element of an owner’s readiness review.
This review will focus on the owner’s organization capability and readiness
to support the program and the various interfaces and delegated authorities
with respect to the owner’s program implementation organization. The
owner’s organization must have a clearly defined capability to provide
oversight of program implementation by the owner’s program organization.
This is typically represented by a PMO in large organizations, but in any
instance, the owner must have internally an ability to assess his own
program team’s performance to ensure they are enabling the various
contractors engaged to implement the program and not duplicating efforts
(man marking is a classic behavior) or erecting barriers to success (tendency
to play “gotchu”).
2-4
The owner’s organization must also demonstrate readiness to:
• Implement the stage gate process consistent with the owner’s own
requirements and consistent with a program’s demands. Approval time
frames, gate expectations and nature of obtained approvals at each gate
must tie clearly into program execution strategies.
• Support management of demand for capital.
• Drive capital efficiency in projects as they advance through the stage
gate process. Among various elements of owner readiness to be
considered would be the early focus on construction realities, constraints
and opportunities that may be found in appropriate means and methods
selection.
• Enhance project execution by providing a disciplined project
development framework.
• Enforce standards on management evaluation of alternatives including
consideration of life cycle cost and performance evaluations. Significant
life cycle performance benefits can accrue from strong incorporation of
O&M considerations in the earliest stages of a program, but many
programs suffer from later stage changes because of lack of an early
focus in this regard.
• Influence acceptable risk frameworks commensurate with investments
being undertaken and the risks the program will face.
• Provide independent validation and verification.
Finally, owner readiness with respect to an individual program and

associated decision frameworks and processes must ensure that the:
• Capability of owner’s technology platforms to support the program are

established and functioning at a level consistent with the program’s
needs
• Physical and cyber security requirements of owner and external
organizations with requisite authorities are consistent with the program’s
risk profile and the sensitivity of data and communications involved
• Required reports by owner on program progress can be efficiently
provided to external stakeholders and that there is a plan to do so
• Internal audit structure and controls are in place and associated
budgeting and staffing requirements are recognized
2-5
• Inspector general role, authorities and resources are clearly defined with
respect to program role and a plan exists to mobilize these resources in
support of the program
Program Objectives and Criteria

The second set of questions which must be addressed as part of assessing the
readiness of the owner’s organization to undertake a major program focus
around program objectives and criteria. The Strategic Business Objectives
(SBOs) discussed at the beginning of this paper must clearly map to
program outcomes and Key Result Areas (KRAs). Project Execution Plans
(PEP) must support top level strategy with cascading KPIs linked to
outcomes and KRAs and flowing down from SBO KPIs.
The program and its scope must be well defined with final and intermediate
deliverables clearly delineated. These include the full range of stage gates
[(Stage Gate 0; Stage Gate 1 (FEL 1); Stage Gate 2 (FEL 2); Stage Gate 3
(FEL 3) as well as EPC; Startup & Commissioning and Operations &
Maintenance.)]
Additionally, the scope of supply and services including associated

responsibilities and accountabilities (RACI); program assumptions,
uncertainties, tracking and modification; applicable codes, standards and
regulations; and design and operating margins, must all be spelled out in a
good level of detail.
One area of readiness often overlooked has to deal with the various
philosophies which influences how an owner shapes the program, the
approach to execution and judges overall program success. Much like
strategic business objectives, the assumption that there is shared
understanding, a common vocabulary or agreement may be a leap of faith
which will result in less than optimal performance as the program advances.
This articulation and integration of owner’s philosophies must encompass a

wide range of areas, including:
• Asset flexibility, availability, reliability and resiliency

• Environmental, health, safety and sustainability
• Life cycle performance characteristics
• Design
• Procurement
• Construction
• Operations
• Maintenance
2-6
• Renewal and end of life
• Stakeholder engagement and support of stakeholder objectives
• Risk management, retention and transfer
Time and money encompass the final two areas to be considered when
assessing owner readiness as it relates to program objectives and criteria.
Program phasing and schedule, even at this early stage, must consider:
• Phasing and scheduling assumptions and precedence

• Constraint coupling
• Minimum operable segments and intermediate milestones
• Beneficial usage and substantial completion
• Final completion
• Schedule related risks and provisions and contingencies
The program’s financial model and cost estimate must address model
uncertainties and scenarios to be considered, quantitative uncertainties, risk
frequency and associated risk model. Risk assessment and management
efforts should have considered risk linked consequences, considerations
related to “fat tail” risks, risk management strategies to be employed and
importantly, retained risks.
Program Planning and Execution Approach

The third set of questions which must be addressed as part of assessing the
readiness of the owner’s organization to undertake a major program focus
around program planning and the execution approach.
The assessment of this third area must begin with the completeness of
baselines documents pre-sanction. Specific baseline documents at this stage
should include scope, schedule and budget; a risk register prepared from the
owner’s perspective; an initial HSES plan; and associated procedures,
including the safety case and major hazards review, quality plan, and
stakeholder management plan.
Some programs may require additional readiness elements such as a startup

and commissioning plan, operating & maintenance plan and procurement
plan. Where procurement is a critical element of program success, it may be
necessary for this early stage procurement plan to address items such as long
lead equipment and materials, fabrication plan, vendor prequalification,
procurement process, selection and negotiation; contract standard terms and
conditions; quality control and inspection; logistics plan; and requirements
related to acceptance and warranty.
2-7
All programs must have a well-developed financial management plan linked
clearly to the program scope and schedule. Any financial constraints, for
example cash flow constraints, need to be clearly identified and factored
into program execution.
Management plans and procedures should be in place to ensure the program

gets off on the right foot. These plans required for adequate owner readiness
typically include:
• Program management plan and procedures

• Design and interface management
• Supply chain management
• Construction management
Finally, plans and execution approaches must be enabled by appropriate

organizational elements, carefully aligned and staffed with individuals with
the right competencies to achieve the strategic business objectives of the
program. Considerations would include the actual program organization as
well as the owner’s program management oversight organization (PMO).
Organizational plans should support required owner approvals and
associated processes.
Required owner competencies should be defined including the required level

and timing (phasing) for requisite skill engagement. Where relevant, owner
staff training, recruitment and human resource organizations should be
considered.
2-8
2.2 Perspective on the Cost of Delayed Decision Making in
Large Project Execution
In this section, we will look at the cost impact of delay without a change in
project scope or project rework. This condition is most closely associated
with general delay as a result of:
• Extended decision making time frames by the project owner

• Project-wide stop work orders from any of a variety of causes
No loss of productivity from project disruption has been reflected except in

the case considered at the end of this section (Figure 13), where lost
productivity from retrograde behavior of the site labor’s learning curve or
production curve is specifically considered. This differs from the so called
“measured mile” approach often used in calculating disruption impacts.
In actual project situations the cause of delay is often associated with

changed scope or rework and disruption and concomitant loss of
productivity are real factors. The simplified analysis presented here is
intended to influence project decision making processes by better
dimensioning the cost of delay in establishing evaluation and decision
making time frames. The cost of a lack of timely decision making is seldom
reflected in project governance processes.
The analyses in this section have been based on unconstrained labor,

equipment and material factors which would act to further exacerbate the
cost of delay. In general, this analysis represents likely minimum costs to be
experienced by delay of a project.
2-9
Figure 1 – Monthly Cost of Delay
Figure 1 illustrates the monthly cost of delay, at the point in time such a
delay occurs, normalized as a function of the project’s initial estimate and
duration. It considers the impacts of escalation and general condition costs,
which persist during the delay period. In this example, escalation throughout
the project period was assumed to be constant. This would represent the
general contractor’s view on cost growth associated with delay, excluding
any impacts from disruption including lost learning curve.
In evaluating the impact of delay, construction progress was assumed to

follow a traditional “S”-curve, with no progress made during the delay
period. General conditions cost were assumed to follow “S”-curve
expenditure rates at a level equal to 10% of the expenditure rate. During the
delay period, general conditions costs were assumed to persist at the most
recent monthly rate. Escalation was applied to uninstalled balances for
simplicity in modeling.
Table 1 – Causes of Delay

Timely decision making by owner
Changed owner performance requirements (fit for purpose redefined)
Intentional delay of project driven by business factors (market conditions,
competing factors requiring management attention, cash flow or other
financial market constraints)
Delayed or withheld regulatory approvals or changed regulatory
requirements
Technical challenges not anticipated
Events anywhere in the supply chain broadly impacting progress
Figure 1 illustrates that the cost of delay, without disruption or loss of

learning curve, is greatest at the initial stages of the project when the
greatest balance to be escalated remains. The greatest impact actually comes
at about 15% of original project duration as general conditions costs ramp
2-10
up faster than the remaining value subject to escalation is reduced. The exact
point in time is a function of the shape of the S-curve, assumed escalation
rate and general conditions costs.
Figure 2 considers the case where escalation grows throughout the project
period. Overall costs are significantly greater (nearly 2 times) and the peak
cost is realized later (25% of original project duration) than that associated
with level escalation throughout the project period. As in Figure 1, the
interplay between general conditions cost, S-curve progress and escalation
on the uninstalled amounts can be seen. All other assumptions are consistent
with the case illustrated in Figure 1.

(Growing Escalation)
Figure 3 illustrates the impact of project delay as a function of when the

delay occurs (percentage of original project schedule) for the case of
declining escalation during the project period. In this example, peak delay
cost is shifted to project initiation in part due to the higher initial escalation
rate used in this model (6% declining to 3.5%).

(Decreasing Escalation)
2-11
Each of these first three cases adopts a cost view akin to that seen by a
general contractor. In reality though, owner’s delay costs are much more and
must include the weighted average cost of the capital they have committed
to the project. These next three cases include the owner’s cost of capital in
assessing the total cost of project delay. All other assumptions are consistent
with those associated with Figures 1 through 3. Owner’s cost of capital is
assumed to be applied to the installed project value and thus tracks the
project’s cumulative S-curve.
Figure 4 – Monthly Cost of Delay with Financing
Figure 4 relooks at the cost of a month’s delay as a function of when the

delay occurs (as a percentage of original project schedule) but now
including the owner’s cost of finance. Escalation is level in this case at 3%
annually (compounded monthly). The weighted average cost of capital
(WACC) was based on a financing structure consisting of 15% equity and
85% debt with 15% and 8% annual cost, respectively.
Several significant changes relative to the case illustrated in Figure 1 are

important to note:
• Overall cost of delay is significantly higher.

• Peak delay cost shifts significantly in time to approximately 60% of the
projects original schedule versus a peak at about 15% of the project’s
original schedule when financing costs are not included.
• Cost of delay essentially does not reduce over time, rather it rises to just
after the midpoint of construction and remains at a high level as more
installed project cost must be carried until project startup.
2-12
(Growing Escalation)
Figure 5 relooks at the case shown in Figure 2 with the owner’s cost of
financing included. The earlier in time that a delay occurs, the more the total
project cost escalates versus an undelayed case. Peak monthly cost of delay
is brought forward versus the levelized escalation example shown in
Figure 4 (40% of original project schedule versus 60%) but still later than
that seen in Figure 2 (25% of original project schedule) where financing
costs were excluded. While we do see some drop-off in project delay cost
over time, it is not as significant as that reflected in Figure 2.
In this example, we can also see the impact of overall higher project
escalation versus Figure 4 with peak values reaching 2.19% versus 1.45% of
original project cost per month of delay.

(Decreasing Escalation)
Figure 6 updates the case shown in Figure 3 to include the addition of the
owner’s cost of financing during a period of declining escalation. The
sawtooth behavior is driven by step changes in escalation rates that become
less significant in driving the overall shape of the curve as escalation builds.
Overall delay costs measurably exceed those observed in Figure 3.
2-13
It is worth directly comparing the monthly cost of delay for levelized
escalation and growing escalation (starting at the same level) with owner’s
financing costs included. Figure 7 illustrates the importance of carefully
modeling escalation for the entire project period in order to better appreciate
the true cost of delay that may be experienced.
The importance of more accurate escalation modeling is particular acute in

the first half of the project period but remains important in all cases
considered.
Sensitivity to Delay Duration

Let us return now to the contractor’s perspective where escalation and
general conditions costs are considered but the owner’s cost of finance is not
included. Looking at a project example where escalation is level throughout
the project period, we can now test the cost of delay for longer duration
delays. In Figure 8, the cost of delay curves are plotted for two, four and six
month delays.
Figure 8 – Total Delay Cost
Delay costs associated with longer durations are higher, driven by

continuing general conditions costs and an extended escalation period.
2-14
Figure 9 provides a different perspective on extended duration delays by
looking at the average monthly cost of delay during the delay period in
relation to the cost of a single month of delay. While these costs have been
plotted against original schedule durations, these delay periods extend
measurably beyond the original schedule, and thus the results reflected in
Figure 8 are more useful in my view. Importantly, longer duration delays are
more deleterious especially when they occur at later stages of project
execution.
Figure 9 – Normalized Monthly Cost of Delay
Sensitivity to Escalation Rate

We have seen the interplay of extended general conditions costs, escalation
on uninstalled balances and in the case of the owner’s perspective on the
cost of delay, the cost of extended financing period before revenue service.
Figure 10 now looks at sensitivity of the cost of delay to escalation rate. The
particular case analyzed assumed a constant delta between escalation rate
and the weighted average cost of capital, in effect reflecting a “real cost” of
money. Escalation was assumed to be level throughout the project period,
but a constant 3% escalation rate was used between the time of the project
estimate and the start of the project one year later in all cases.
2-15
Figure 10 – Sensitivity of Delay Cost to Escalation Rates
Three different points of delay have been considered, 25%, 50% and 75% of
original project schedule. As expected, delay costs rise with increasing
escalation rates (2% to 8%), with earlier project phases (25%) more
sensitive to escalation rate increase than later project phases (75%). The
interplay of general conditions cost, escalation rate and WACC level
influence the level and shape of the delay cost curves at each project time
point.
Sensitivity to Schedule Duration

In each of the cases considered to this point, an original project schedule of
10 years was assumed. Figure 11 now looks at the sensitivity of the monthly
cost of delay to original project schedule adopting the owner’s perspective
with the cost of finance included. The difference is significant and acts to
highlight the importance of timely decision making by the owner at all
stages of the project. In that many project schedules are shorter than the 10
years assumed in the prior analyses, the impact of delay is even greater than
that previously outlined.
2-16
The relationship of escalation and financing rates creates a maximum impact
for a 6 year schedule duration given all other assumptions with a cost of
delay approximately 5 times what is seen in the 10 year schedule which was
used in all prior cases evaluated.
From the owner’s perspective, the point in time at which the delay occurs is
less significant than the original schedule duration of the project.

(Owner's Perspective)
The general contractor’s view of delay cost as a function of original

schedule duration differs from that of the owner since he does not
experience the financing costs that the owner incurs. Figure 12 looks at the
comparable delay cost versus schedule duration from the contractor’s point
of view. The absence of financing costs in delay cost considerations
eliminates the duration related maxima observed by the owner. For the
contractor, the cost of a month’s delay decreases as a percentage of original
project cost as project schedule grows in duration.
Unlike the owner, the contractor’s view is more sensitive to when the delay
occurs, with early delays being more significant (ignoring impacts on
productivity) because of the higher levels of escalation he experiences.
These differing views are reflected in the contractor’s desire to receive
necessary approvals from the owner to proceed full speed ahead.
2-17
(Contractor's Perspective)
Estimating the Impact of Delay on Productivity from Retrograde

Learning Curve
Estimating the impact of delay on productivity is the subject of extensive
research in the engineering and construction industry. In such, estimates
principal factors to be considered include:
• The traditional learning curve or production function that best

characterizes uninterrupted productivity improvement as the project
progresses
• The maximum productivity rates realized as it relates to average
productivity
• The amount of learning curve and therefore associated productivity rates
during the delay period
For purposes of better dimensioning the cost of delay by including the

increased cost associated with lost productivity from a retrograde learning
curve, we constructed a simple model of productivity over the project’s
duration. It is not intended to suggest that this is an accurate representation
applicable to all major engineering and construction projects but rather a
reasonable first approximation for purposes of this cost of delayed decision
making analysis. The approach used differs from the so called “measured
mile” approach by specifically including a loss of learning curve during the
delay period. For purposes of this analysis, we assumed:
2-18
• Productivity during the first 5% of the project was at 50% of average
productivity
• Maximum productivity is 150% of average and was reached at 50% of
the project schedule
• Average productivity was calculated as being achieved at 43% of the
project’s original schedule based on the above assumptions.
The impact of delay on productivity was calculated as the loss of

productivity based on 50% of the difference between the productivity rate at
the time the project delay began. The productivity rate at an earlier period of
time was determined by subtracting the delay duration to model a loss of
learning curve. This lost productivity factor was then modeled as increased
labor costs over a period of time equal to the delay duration. Labor costs
were assumed to represent 40% of period expenditures based on experience
in the heavy civil industry.
Project delays within the first 5% of project duration were assumed to have
no impact while those after peak production had been reached assumed to
decline to values associated with the period prior to peak production being
reached.
Figure 13 illustrates the percentage growth in delay cost as viewed by the

owner (cost of financing included) as a function of delay duration and
timing. The modest values reflect the conservative modeling of disruption
and an absence of rework or constraints.
2-19
Figure 13 – Delay Cost Growth to Owner from Lost Productivity
The cost of delay growth experienced by the contractor will be a higher

percentage since it will be added to a smaller cost of delay that ignores
growth in financing cost. By comparison, the contractor will experience a
6.45% growth in the cost of delay at the midpoint of the original schedule in
the case of a 6 month delay. This compares with the 4.37% growth as seen
from the owner’s perspective.
Summary
Timely decision making is essential to effective project execution and lack
of strong risk and cost based governance processes can have significant
impacts in overall costs experienced by both the general contractor and
owner. These impacts are a function of many factors, including:
• Baseline project cost

• General escalation level
• Change in escalation rate over the project performance period
2-20
• Level of general condition costs
• Proportion of project costs subject to learning curve effects
• Weighted average cost of capital
• Delay duration
• Point in time when delay occurs
The perspectives of the contractor and owner differ significantly on the total
cost of delay, but governance processes intended to promote the owner’s
interests would be well served by adopting the more comprehensive cost
view of the owner as described in this paper.
A $4 billion project (not uncommon in the world of large infrastructure and

industrial projects) subject to a delay of one day in decision making would
increase an owner’s cost by $10 million. Was the day lost in decision
making worth it?
2.3 Managing the Planning Fallacy

Daniel Kahneman’s book, “Thinking, Fast and Slow” returned his concept
of the “planning fallacy” to the project management center stage when
considering large, complex projects and programs. First coined by
Kahneman and Amos Tversky in a 1979 paper, the planning fallacy is the
tendency of people and organizations to underestimate how long a task will
take even when they have experience of similar tasks over running.
Perhaps the poster children for the planning fallacy are large scale public
works projects. In a 2006 paper in the Project Management Journal, Bent
Flyvbjerg describes transportation projects “inaccuracy in cost forecasts in
constant prices is on average 44.7% for rail, 33.8% for bridges and tunnels,
and 20.4% for roads.”
Work by Kahneman, Tversky, Flyvbjerg and others show that errors of

judgment are:
• Systematic and predictable

• Reflect bias
• Persist even when we are aware of
• Require corrective measures that reflect recognition of this bias
These natural tendencies are further exacerbated when “motivated”

individuals frame questions in such a way as to constrain the range of
possible answers.
2-21
Consider these two situations. In the first, a manager is given responsibility
to come up with a budget and schedule for a large project. He engages
outside help, conducts a thorough risk analysis and looks at comparable
other projects. In the second, a manager is asked by the politically appointed
Chairman of the Authority if he can do the same project for $XX. Which
answer are you more comfortable with?
Reference class forecasting is one method for suspending one’s impressions

and providing a more critical evaluation of the task at hand. It addresses the
natural tendency to underestimate costs, completion times and risks while at
the same time overestimating benefits. It squeezes out biases while
considering the inevitable “improbable” risks that all projects face. The risks
that inhabit the “white space” between elements of a program and possibly
even the odd “Black Swan” that shows up from time to time.
The Association for the Advancement of Cost Engineering (AACE) has

recognized the value of estimate validation using separate empirical-based
evaluations to benchmark the base estimate, the equivalent of reference
based forecasting. This estimate benchmarking process is widely used in the
process industries but need not be constrained to them.
Reference Class Forecasting

Appendix 3 provides an example at how reference class forecasting can be
used not only to provide a basis for checking planned execution approaches
and associated project timelines but also to identify how the execution
methodology and, in this case, even the contracting strategy will need to be
modified.
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In this chapter, we will look at the CAPEX related levers that can be pulled
to improve a project’s capital efficiency. We will focus on two significant
elements related to improving construction productivity and efficiency and
managing CAPEX phase risks.
In Section 3.1, we will introduce the notion of an expanded basis of design,

alternately referred to as a Business Basis of Design (BODX). In Section 3.2,
we will look at some strategies to reduce risk, which if realized degrades
capital efficiency as well as reducing capital and schedule certainty.
3.1 Addressing Capital Efficiency through a Business Basis

of Design
Large capital construction projects across all market sectors are challenged
today in three significant ways:
• Capital efficiency of the project. This considers both first costs as well
as life cycle costs.
• Capital certainty. Reflecting execution efficiency, predictability and
effective risk transfer through appropriate contracting strategies.
• Time to market. Perhaps best thought of as schedule certainty but also
accelerated delivery of projects, often an essential ingredient in
capital efficiency.
This and the subsequent chapter focused on OPEX cost focus on achieving
improved capital efficiency in large capital asset projects through the
adoption of an expanded basis of design (BOD) that considers all aspects of
a capital asset’s life cycle. In many projects today, the BOD largely
3-1
encompasses the engineering parameters which are required to meet the
owner’s project requirements.
Constructability and maintainability are often treated as review items to

confirm that the developed design is both constructible and maintainable
and to suggest improvements at the margins. Effective constructability and
maintainability reviews add value to the project but do not fundamentally
act to shape the design itself in most instances.
More, much more, is required to develop effective designs that are

developed with construction and maintenance as fundamental project
requirements. In this sense construction and maintenance considerations are
not items to be reviewed but rather
fundamental requirements to be
satisfied together with other project
requirements established by the
owner. The change suggested is
about a shift in mindset and
perspective as well as in our design
work processes.
Terminology & Definitions

The following constitute the key terminology used in this and the
subsequent chapters and provide the context for a so-called “Business Basis
of Design.” This term, an “expanded basis of design” and BODX are all used
synonymously.
Owner’s Project Requirements (OPR). Sometimes confusingly called

“design intent” but referring to OPR.
BOD. Functional or performance based narrative description of what

designer will do to meet OPR; finalized at end of construction; includes
assumptions and criteria used.
CBOD (Construction Basis of Design). Narrative description of

construction requirements to be reflected in design (developed by
construction manager) and finalized at end of construction; includes
assumptions and constraints used including means & methods preferences
(specific tools or equipment as an example).
O&M Basis of Design (O&MBOD). Narrative description of operations

and maintenance (O&M) requirements to be reflected in design (developed
by operator/O&M) and finalized at end of construction; includes
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maintenance philosophy, assumptions and criteria used. Provides a basis for
development of the O&M program and manual.
BODX. Expanded BOD, collectively incorporating the traditional

engineering BOD, new construction basis of design (CBOD) and a new
operating and maintenance basis of design (O&MBOD). BODX is driven by
construction and O&M considerations while meeting the performance and
functional requirements typically detailed in the OPR.
Focus of BODX
The Business Basis of Design, or BODX, is focused on improving the
quality and cost effectiveness of the developed design throughout the full
life cycle. Specifically, it:
• Ensures all project participants are aligned on strategic business

objectives as reflected in OPR
• Ensures owner, construction management and O&M are clear on wants
and needs
• Ensures designer is focused on supporting an efficient construction
execution strategy which reflects project construction considerations,
opportunities and constraints
• Informs the process for identification, evaluation and selection of design
solutions to meet functional or performance specifications
• Provides expanded criteria to evaluate and validate design solutions
and submissions
• Provides clear acceptance criteria verified during construction,
commissioning and initial operation
• Informs decisions on equipment selection, layout, installation,
operation, maintenance and replacement until requirements change
• Delivers a more effective asset management database at startup
• Improves construction efficiency and effectiveness
• Enhances construction safety
• Improves O&M efficiency and effectiveness
• Supports 7DSM Optioneering, considering all life cycle costs
The BODX encompasses the traditional “engineering” BOD as well as an

expanded BOD encompassing construction, operations and maintenance
3-3
considerations. The following section further develops the scope and content
of the construction basis of design (CBOD) and the next chapter looks at
the O&MBOD.
Common to each of the three basis of design requirements are the following
three elements:
• Project narrative
• Rationale from the defined perspective
• Validation and verification
This last element is often not adequately addressed in developed BOD

documents but takes on increased importance as:
• Inspection technologies allow us to “see” previously undetectable flaws

• Construction means and methods around which a design may be
developed are assessed for completeness of design inclusion and actual
effectiveness
• Performance based standards and contracting take on larger roles in
facility development and operation.
Elements of a Construction Basis of Design (CBOD)

The CBOD seeks to further actualize CII Constructability Concepts I-1
and I-5:
• CII Constructability Concept I-1 states “Constructability Program is an

integral part of the Project Execution Plan.”
• CII Constructability Concept I-5 states “Basic design approaches
consider major construction methods.”
Specific elements that an effective construction CBOD consider include:
• Comprehensive identification of required or preferred construction

strategies, tactics, techniques and tools to be incorporated in the
construction process that influence project management and design
• Construction labor, skills, equipment, materials of construction and
logistical constraints to be reflected in BOD
• CBOD addresses unique requirements to be incorporated in design
development that reflects owner or contractor preferences for achieving
the owner’s project requirements (OPR)
3-4
These requirements may reflect:
• Prior experience of the owner

• Unique risks, opportunities or constraints associated with the project
• Contractor capabilities and experience
• Special tools uniquely available to the project
• Broader programmatic objectives required of the owner or
independently committed to by the owner that influences construction
execution
• Applicable safety program to be used on project
CBOD considerations may be broadly grouped as basis of design

requirements related to:
• Labor
• Equipment
• Materials
• Means & methods
• Management processes and practices
Photo: Left Coast Lifter – SFOBB

"Photograph © Joseph A. Blum"
3-5
Labor
• Sourcing
− Labor relations
 Work rules and requirements
 Labor jurisdictional requirements to be addressed
− Visa requirements, limitations and process durations
− Multi-national labor force impact on site segregation and
development
• Safety
− Hazard elimination
 Hazard avoidance or reduction features to be facilitated
by design
• Eliminate hazards
• Pinch points
• Heavy lifts minimized or eliminated
− Use of jack up construction
− Vertical modules
• Work at height
− Minimized or eliminated by construction at grade (less than 6 feet)
− Permanent structures incorporate platforms or provisions for
temporary platforms
• Hazard mitigation
− Reduce the hazard
 Equip any required scaffolding with railings and toe boards
3-6
− Improved access to workface
 Access requirements for construction identified considering
sequence of construction (and maintenance)
 Enhanced positional awareness through use of RFID
• Knowledge
− Labor
 Activity linked safety and skills training reflected in
construction resourcing plan and master project schedule
 Activity linked equipment, materials and tools to facilitate
staging and reduction in idle time
 Reskilling for later stage activities including maintenance phase
activities
• Welfare
− Onsite medical facilities and requirements
− Camp requirements (facilities and services)
 Productivity
− Enhance labor productivity through design
 Minimize the number of SKU’s for components and materials
to be manually installed (nuts and bolts; welds; fasteners)
 Use controlled environments at environmentally challenged
sites
• Early usage of permanent facilities (warehouse, admin
building)
• Temporary facilities provided for in plot plan development
(dynamic air shelters)
Equipment
• Procurement
− Labeling/tracking requirements (barcode/RFID)
− Measurement units in installation (and maintenance) documents
(English/metric)
− Orientation of installation schematics to conform to installation
position
− Hazard mitigation
 No sharp corners
• Logistics
− Incorporation of adequately sized and placed lifting points
− Shipping and packaging to eliminate removal of temporary bracing
− Single stream protection and packaging materials to facilitate
recycling
3-7
• Installation
− Self alignment
− Self leveling
− Required lay down and movement envelopes including associated
logistical equipment
− Access corridors for installation
• Pre-commissioning
− Incorporation of pre-commissioning isolation valves and electrical
lockouts required
− Accessible temporary attachment points for test equipment
Materials
• Preferred material sources and alternates and impact on design
• Material tracking requirements to be reflected in design specifications
• Preferred logistical approach and impact on design
• On-site use of batch plant – Available quality of concrete
• Concrete placement strategy – Pumped versus bucket
• On-site bending of rebar – Quality considerations to be reflected
in design
• On-site welding of pipe and structural steel assemblies – Impact on
design and construction sequence
Means & Methods

• Focus is on means and methods selection rationale for design impacting
elements of construction
• Strategies
− Reduce indirects
 Reduce general conditions cost by
• Shortening schedule elements with high GC costs
(specialized labor or equipment)
• Reducing overall project schedule
 Reduce need for enabling works
• Reduce overall project schedule
 Modularization/fabrication with appropriate metrics such as
manhours displaced embedded in each shipment received
 Requirements for off-site construction
3-8
• Tactics
− Reduce temporary works
 Minimize need for scaffolding by incorporating platforms or
support for temporary, reusable platforms in structural design
 Incorporate temporary steel for shipping of assemblies in final
assembly design to eliminate removal of shipping steel
− Reuse formwork and temporary works
− Size foundations to re-use formwork
− Minimize excavations
• Techniques
− Lift many once – High lifts with long duty cycle benefit from lifting
many items at once to height and final placing with alternate
equipment
 Daisy chaining requires lift points that facilitate safe lift
 Racking and packaging for lifts may eliminate lifting skids
and pallets
• Tools
− Unique equipment to be employed
 Heavy lift
• Example – Left Coast Lifter
 Welding
 RFID
Management Processes and Practices

• Owner’s policies, guidelines or other directives affecting construction
• Regulatory limitations on construction practices, means & methods
• Desired sequence of construction
− Early works packages required
− Permanent facilities to support construction
− Trade sequencing or other labor driven sequencing
− Restricted construction
− Preliminary execution strategy and plan
− Eliminate later stage trenching operations impacting site logistics
− Incorporate commissioning sequence and temporary facilities and
equipment
− Establish “site needs” dates (including mod yard need dates)
• RFI reduction by reflecting means & methods considerations in design
model (BIM)
3-9
• Sustainability
− Construction energy, water and waste requirements
 Energy
 Waste
 Water
 Social
• Knowledge transfer
• Community development
• Industry development
− Areas targeted for local sourcing
• Validation and verification
• Quality control and assurance
• Commissioning
− Provisions to be reflected in design
 Systems/subsystems/components should be designed to be
functionally, mechanically, electrically and electronically as
independent as practical to facilitate pre-commissioning testing
 Recognize that commissioning starts with the first drawings in
the feasibility stage
• Workface planning
Postulates of Construction
Over the years I have had the opportunity to see many construction projects,
typically projects of scale. These have included a wide range of industrial,
infrastructure, mining and government projects of varying degrees of
complexity and challenge. I have tried to synthesize some of my “learnings”
over the years in a series of “postulates” that hopefully will help
construction managers, foreman, supervisors and those responsible for the
projects they undertake on their behalf to at least ask a better set of
questions.
Merriam-Webster defines “postulate (n)” as a hypothesis advanced as an

essential presupposition, condition, or premise of a train of reasoning. My
intent here is more in tune with “postulate (v)” to suggest (something, such
as an idea or theory) especially in order to start a discussion.
These postulates are not complete and I welcome other suggestions and
additions. Many are underpinned by the various illustrative stories I have
told over the years but are not captured here.
3-10
Prieto’s Postulates of Construction
1. Eliminate hazards first; manage them next; ignore them at your peril.
2. Lift many, once.
3. The largest controllable cost at a construction site is the cost of waiting
– maximize time on tool.
4. Sweat the small stuff – details matter. Pay attention to the nuts and bolts
of construction – literally.
5. All construction problems are underpinned by management failings or
human factors – look deeper.
6. Plan, challenge, plan again, check.
7. Plan, check, do, confirm, learn, improve.
8. Efficient execution requires clear communication; the greatest barrier to
communication is the perception it exists.
9. The man who says he can’t and the man who says he can are both right
10. Logistics drive construction logic.
11. The art and value of tool making is too often ignored.
12. Complacency kills.
13. Projects fail due to lack of clarity, agreement and constant articulation of
top level business objectives! Assumption of top level agreement makes
an ass out of you and me.
14. Assumptions migrate – know them; track them.
15. The greatest opportunities are often the ones not looked for.
16. Management by walking about is about many things but most
importantly it is about seeing from many perspectives.
17. All work processes have “natural cycles,” sequences of activities that
repeat. Attack cycle time.
18. Assign time a value – and then get on with it. The cost of (unnecessary)
delay is always underestimated.
19. Find the time to plan or you will have to find the time to redo.
20. The value of location specific information is too often overlooked.
21. Continuous improvement is driven by those closest to the workface;
innovation is often driven by those furthest from it.
22. Ineffective listening is the number one shortcoming of poor supervisors.
3-11
23. The most dangerous phrase at a construction site is “we’ve always done
it this way.”
24. Attack indirect costs with the same vigor as direct costs – that is where
true profitability lies.
25. Do in parallel what does not need to happen in sequence.
26. Manage the white space between workfaces, activities, crews, shifts,
project phases and projects. Black swans nest and breed in these white
spaces.
27. Offsite fabrication effectiveness is related to manhours displaced and
manhour density transported to the site – not tons of modules.
3-12
3.2 Candidate Strategies to Reduce Risks
Every large engineering and construction program is different, as are the
risks it faces. There are no silver bullets for managing and reducing risks in
these large programs but there are some recurrent strategies. This section
lays out some candidate strategies organized from a “Triple Bottom Line” or
sustainability perspective.
I have chosen this sustainability framework in recognition that a more

holistic, life-cycle approach is characteristic in these emerging “giga”
programs and consistent with the strategic program management approach I
have written about previously. The social and environmental dimensions
have growing influence in capital efficiency of major project assets during
both initial construction and subsequently in operations.
Not every candidate strategy is viable, necessary or desirable on every large

engineering and construction program. Nor is the list of such strategies
complete. The purpose of this section is to start the process of identifying
strategic options and tactics to reduce the risks that a major program faces.
While many risks will be driven by externalities, internal performance based

risks should not be ignored as they represent some of the greatest risks in the
successful delivery of any large scale program. This can be seen in the
following figure.
Main Reasons for Non-Optimum Execution Performance
3-13
Let’s look at these risks and potential candidate strategies utilizing the
following sustainability framework:
• Economic
• Social
• Environmental
• Management
Economic
Sustainable program dimensions from an economic perspective include:
• Labor availability & cost

• Labor productivity
• Labor impacts on program location
• Material availability & cost
• Long lead equipment
• Construction equipment
• Logistical costs
• Life cycle costs
• Relocation or reconfiguration costs
• Industry creation
• Balance sheet
• Risk & insurance costs
Each of these dimensions lends itself to one or more candidate strategies to

reduce risks in large engineering and construction programs.
Table 2 looks at each of these dimensions and suggests candidate strategies

for consideration.
Table 2 – Candidate Strategies to Reduce Risks in the Economic

Dimension from a Sustainability Framework Perspective
Sustainable Program
Dimension Candidate Strategies
Labor Availability & • Module construction in labor rich, low cost
Cost location; maximize manhour density in
modules shipped
• Aggressive pre-fabrication and
pre-assembly strategies
• Use of global engineering centers
• Specific candidate strategies for
modularization, pre-fabrication and pre-
assembly include:
3-14
Sustainable Program
− Precast underground duct banks
− Precast electrical and telecom pull boxes
− Maximize steel fabrication to complete
assemblies (stair towers, access
platforms)
− Pipe support, electrical/instrumentation
stanchions all prefabricated and
assembled
− Tanks shop built
− Prefabricated electrical vaults, telecoms
buildings, and control rooms
− Standardized electrical vault cable tray
runs and preassemble (or include in
modules as appropriate)
− Underground pipes spooled to 80 foot
lengths, coated, and tested
− Precast concrete sumps and pipe
trenches
− Maximize size of vendor skids to include
all piping, electrical, and controls
− Preassemble any overhead cranes not
incorporated in modules
− All remote pumps mounted on common
skids and pre-piped with all controls
− Precast road crossings for pipe or cable
− Warehouse and workshop as fold-away
type buildings with internal frame for
overhead crane
− Camp buildings fully modular, including
mess hall
− Precast and preassemble any haul road
bridges required
• Water treatment skids
• Tilt-up construction for any electrical fire
separation walls
• Precast any temporary building foundations
• Conveyors completely preassembled,
including cable trays, walks, ladders
railings, etc.
• Conveyor bents fabricated in largest
transportable sections
• Temporary power skid mounted
• Temporary, floating dormitory
• Modular construction camp housing
• Modular wharf
3-15
Sustainable Program
• Standardized modular plant buildings
• Floating desalination facilities
• Floating power plants
Labor Productivity • More detailed and earlier construction
planning integrated into Master Schedule.
Emphasis will be identifying coupled
constraints (labor, materials, equipment,
logistics, etc.)
• Early craft training for unique skill sets
required by the various projects comprising
the program
• Comprehensive skill based labor needs and
availability assessment
• Craft training at select locations outside the
final program location when to the
program’s benefit (example would be a
module yard)
• 3D design of modular portions of design to
enhance module construction and
subsequent relocation of modules if
so required
• Protyping of highly repetitive modules or key
program elements
• Establishment of an owner owned module
yard in a favorable location that would be
available to the various project contractors
• Designs will optimize execution not design
while meeting requisite criteria
• Embed architect and engineer in field during
critical construction operations
• Dates established for scope and design
freeze to minimize impact of changes
• Industry leading safety program recognizing
its impact on site productivity
Labor Impacts on • Maximize low value, high impact
Program Location construction accomplished by
pre-fabrication, assembly and
modularization outside final program
location
Material Availability & • Maximize standardization across projects to
Cost simplify supply chain and gain purchasing
leverage
• Put in place select strategic supplier
relationships for major material supply
categories.
3-16
Sustainable Program
• Broad multi-project procurement strategies
to be considered include:
− High value, major process equipment
utilized in multiple projects or across
multiple program phases
− Large quantities of supporting equipment
(pumps, motors, control valves, signals,
switches)
− Bulk plant materials (piping, valving,
cabling, stairways, windows, ladders,
grading, roofing, doors, coordinated
architectural details or finishes)
− Materials of construction (steel, concrete,
aggregate)
− Construction consumables (fuel,
formwork, safety supplies)
− Non process infrastructure (camp
housing, supporting camp facilities,
culverts, administrative or other temporary
buildings, concrete chases)
• Logistical services (heavy marine, railroad,
trucking, expediting, customs, permits,
specialized transport)
• Miscellaneous construction services
(temporary power, canteen, sanitary, waste
disposal, security, construction vehicle
maintenance)
• Identify risks best retained and managed by
owner than in individual projects. Strategies
include use of commodity hedges,
exchange rate risk retention (FOREX) and
hedging, wrap up insurance policies either
by owner or contractors.
• Risk arbitrage strategies include:
− Fuel cost hedges
− Heavy marine transport hedges
− Currency hedges
− Aluminum hedge
− Iron ore and metallurgical coal hedges
(steel surrogate)
Use of more extensive client furnished
materials program to secure market pricing
and delivery leverage; reduce contractor risk
provisions and markups associated with such
materials
3-17
Sustainable Program
Long Lead Equipment • Strategic suppliers engaged in the front end
engineering process
Construction • Construction equipment forecast and
Equipment evaluation of assured supply
Logistical Costs • Embed a technical translation function in
offshore construction sites
• Material handling wharfs to avoid handling
delays at port main facilities
• “Possessions” of critical infrastructure for
transport managed
• Logistical requirements forecast
Life Cycle Costs • Incorporate consumable cost risks and
volatility into life cycle evaluations
• Develop approaches that maximize end of
life value (re-use; alternative use; recovery
of valuable materials facilitated)
Relocation or • Construct high value facilities in module
Reconfiguration Costs sizes and weights that lend themselves to
transport to future program elements
(example: mine crushing and screening
facilities and sampling stations relocatable
to future mine sites)
Industry Creation • Capacity development program coupled
with mentor-protégé contracting
Balance Sheet • Acquire select program elements on a non
CAPEX basis (DBOM; PPP; delivered
service.)
• Candidates include:
− Specialty equipment with strong technical
maintenance component or desired
extended warranty
− Non process infrastructure best treated as
part of operating cost versus consuming
limited CAPEX (site based housing, power
generation, water treatment)
− Non process infrastructure which lends
itself to economies of scale by serving
multiple programs (offsite power;
desalination; wastewater treatment;
housing; community facilities; medical
facilities)
− Common carrier facilities such as
pipelines; transmission lines;
communication backbones
3-18
Sustainable Program
− Logistics facilities best delivered on a
multi-user basis (railroad; port & wharf
facilities)
Risk & Insurance • Self insured, pooled risk reserves:
Costs − Worker’s compensation risks
− Property risk
− Vehicle risks
− Escalation risks in select commodities
− Benefit & welfare program risks
− Builder’s risk
− Environmental risk
− Sovereign and regulatory risks
Social
Sustainable program dimensions from a social perspective include:
• Procurement and contractual frameworks

• Craft capacity building
• Management capacity building
• Global leading best practices
• Societal supporting facilities
• Managing uncontrollable growth
• Performance management

for consideration.
Table 3 – Candidate Strategies to Reduce Risks in the Social

Dimension from a Sustainability Framework Perspective
Sustainable Program
Procurement & • Transparent procurement system and
Contractual process available to and required to be
Frameworks used by all project contractors
• Partnership Against Corruption Initiative
(PACI)
• Modern Terms & Conditions reflecting
appropriate risk allocation
• Streamlined contract change process to
avoid delays
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Sustainable Program
Capacity Building – • Early craft training for unique skill sets
Craft required by the various facilities
• Comprehensive skill based labor needs and
availability assessment to be undertaken
Capacity Building – • Skill requirements definition and
Management management training focused on program
and project management
• Mentor-protégé relationships with
executives from outside the program team
• Task force assignments to gain deep
exposure to new areas
Global Leading Best • Industry leading best practices on safety
Practices recognizing the value of a human life
• Confirmation of sustainability program as
global best practice
Societal Supporting • Contract with affected stakeholder groups
Facilities for delivery
Manage Uncontrollable • Early and ongoing labor and logistical
Growth requirements forecasts, including forecast of
indirect human (accompanying persons and
families; service labor demand induced by
program labor force) and logistical demands
(transport, travel, housing, power, water,
food, sanitary demands by accompanying
persons, families and service labor)
• Location of work sites at distributed
locations when possible including execution
of work at pre-assembly, pre-fabrication or
module yards at remote locations
• Limiting new permanent facilities to those
consistent with longer term growth plans
• Limited licensing of industrial supporting
facilities not desired post construction.
Operating needs must be factored into
such limitations
Performance • Early PMC issuance of common “social”
Measurement bottom line metrics
Environmental
Sustainable program dimensions from an environmental perspective include:
• Waste streams
• Energy
• Water
• Recyclable/reusable materials
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for consideration.
Table 4 – Candidate Strategies to Reduce Risks in the

Environmental Dimension from a Sustainability Framework
Perspective
Sustainable Program
Waste Streams – • On-site use of select waste streams (heat,
General water, compostable materials)
• Pre-fabrication, pre-assembly and
modularization as strategies to “leave waste
streams behind”
Energy • Waste energy use for central heating or
cooling of nearby housing or community
facilities
• Implement energy reducing strategies during
construction.
• Specific strategies include:
− Consolidated shipments to the site
− Renewable energy to meet onsite
construction power needs
− Use of micro grids
− Onsite power storage of excess generation
− Cut and fill balancing
− Reduced number of lifts and working at
height
− Energy control devices to shut off idle
equipment
− Proper maintenance of heavy equipment
− Improved insulation of camp facilities
− Waste stream reduction to reduce handling
and transport of waste streams
− Use of natural heat sinks
− Incorporation of shipping reinforcement in
final module design (no removal; no waste
transport)
− Emphasis on efficient laydown areas
− Improved workface planning
Water • Select grey water use for agriculture
• Minimize potable water use during
construction
• Runoff water capture
• Use of grey water in wash down operations
• Use of grey water in concrete manufacture
• Use of grey water in dust control operations
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Sustainable Program
• Use of grey water for landscaping operations
• Use of grey water for fire protection
operations
• Use of reclaimed water as makeup water in
select power and process applications
• Separate potable, grey water and black
water systems at construction sites
• Wastewater (black water) mining with limited
treatment for use in grey water applications
Recyclable/Reusable • Scrap recycling (wood, metals, packing
Materials materials)
• Specification of recyclable packaging
materials
Management
While not a sustainability dimension per se, management’s cross cutting
nature warrants a separate callout in Table 5 as it relates to candidate
strategies to reduce risks in large engineering and construction programs.
Many more traditional strategies exist and have not been repeated here.
Rather, some less frequently considered strategies have been called out.
Table 5 – Candidate Strategies to Reduce Risks

in the Management Dimension from a Sustainability
Framework Perspective
Sustainable Program
Management • Dedicated client elements embedded within
the PMO
• Salt and pepper organizational approach to
foster management development within the
client organization while maintaining
independent PMO role within client
• Cross cultural training given the nature of
the program and the global supply chain it
will require
• Time lapse photography to document
progress and support subsequent marketing
efforts. Select use of IMAX photography for
program marketing if a public or high
profile program
• Actively capture procurement and
construction lessons learned and make
available to all program contractors in an
appropriate manner
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Sustainable Program
• Address multiple site document control
needs to meet owner requirements
• Early clarity on applicable codes, standards
and inspection requirements and freeze
• Augmented supplier quality assurance and
audits by the PMC
• Robust progress management standard
and audit
• Startup readiness risk assessment and
planning initiated at outset of program
• Tollgate process drives schedule
• Knowledge management program initiated
across all projects
• Early and ongoing stakeholder engagement
and management
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In this chapter, I will look at the capital efficiency lever focused on
operating and maintenance (O&M) expenditures. These will be narrowly
focused on the facility itself and not explore strategies related to feedstocks,
sales and marketing. In Section 4.1, I will continue the development of a
Business Basis of Design (BODX) now looking at the early consideration
and shaping that an O&M Basis of Design (O&MBOD) presents. In section
4.2 I will look more closely at the role of a sound asset management system,
a key component in life cycle capital efficiency, and some of the
impediments often associated with implementation.
4.1 Elements of O&MBOD

O&M costs often represent over half of life cycle costs of a capital asset on
a present worth basis as shown in the following figure for a typical steam
assisted gravity drain (SAGD) oil sands project.
SAGD Life Cycle Costs
4-1
Development of an effective O&M basis of design should as a minimum
encompass:

strategies, tactics, techniques and tools to be incorporated in the O&M
process that influences design
• O&M labor, skills, equipment, materials (including consumables), and
temporary provisions for maintenance to be reflected in basis of design
• O&MBOD addresses unique requirements to be incorporated in design
development that reflects owner or contractor preferences for achieving
the owner’s project requirements (OPR).
These requirements may reflect:
• Prior experience of the owner

• Unique constraints associated with the project location, environmental
setting, process operations, and labor availability, cost and skills level
• Contracting community capabilities and experience
• Special tools required for major maintenance
• Broader programmatic objectives required of the owner or
independently committed to by the owner that influences maintenance
execution
• Applicable safety program to be used during facility operation
4-2
O&MBOD considerations may be broadly grouped as basis of design
• Labor
• Equipment
• Materials
• O&M practices and techniques
Labor
• Sourcing
− Provisions required to address union work rules
− Provisions required to meet workforce cultural or local practices
requirements
 Example – Prayer rooms, special food preparation requirements,
gender segregation
4-3
• Safety
− Hazard elimination
 Identify changed safety conditions associated with maintenance
activities and eliminate or mitigate new safety hazards
 Access points and covers should not have sharp corners
 Design should reflect safe access for maintenance and repair
 Avoid hazardous access points (manholes in live traffic areas)

 Reduce weight of components frequently moved (manhole
cover, access plate, paving slabs, concrete curbs)
 Provide for “isolation” of equipment to maintenance under
continuous operations
• Lockout valves and switches
• Electrical isolation
− Hazard mitigation
 Reduce the hazard
• Minimize work at height
• Minimize hand operations during maintenance
• Minimize potential pinch points
• Minimize sharp corners
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• Minimize exposure time in extreme environments
associated with periodic maintenance
• Minimize need for lifts or temporary ladders for routine
maintenance
 Improved access to workface
• Required work platforms and equipment laydown or pull
areas to be reflected in design
• Space provisions for temporary equipment required for
maintenance operations and accessibility envelope
• Knowledge
− Ensure full engineering, procurement, and construction data pull
through to asset management and O&M systems
• Productivity
− Facilitate grouping or simultaneous performance of maintenance
operations
Equipment
• Maintenance
− Incorporate maintenance provisions in design development
 Reflect maintenance set-up and staging requirements
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 Identify typical combinations of maintenance activities in plant
and systems design and layout
 Design for rapid replacement of routine maintenance items
(plug and play; quick opening fasteners)
 Systems/subsystems/components should be designed to be
functionally, mechanically, electrically and electronically as
independent as practical to facilitate maintenance and testing
 Maintenance “envelopes” should be reflected in design layouts
 Increase accessibility to areas of frequent maintenance
• Provide flat laydown areas for components removed during
maintenance or replacement
• Identify provisions for maintenance (scaffolding, lifts, etc.)
• Identify any maintenance crane or other temporary
equipment support points and confirm capacity and
clearances
 Minimize joints and bearings
− Incorporate temporary maintenance provisions in base design to
avoid use of temporary hoses, power lines etc.
 Power
 Water
 Compressed gases
 Wastewater including spill collection
 Attachment points (for lifting equipment for access removal or
repair or replacement)
 Attachment points for temporary crane rails or mobile
equipment envelopes
• Repair
− Reduce spare parts requirements, costs and risks through design
 Minimize spare part types
 Identify long lead items for spares planning
 Ensure long term availability for spares
 Standardization of components to minimize maintenance spares
and tool sets
4-6
• Replacement
− All machines fail
and must be
repaired or
replaced. Provide
for this activity
 Consider
replacement
strategies for
major
components over the project’s full lifetime
Materials
• Minimize maintenance to the extent achievable
− Improve deterioration and environmental resistance of exposed
systems and structures (mildew; organic pollutants)
 Moisture – Eliminate ponding especially on exposed steel
surfaces and ensure good drainage
 Caustic materials, including materials associated with cleaning
and maintenance
 UV light
− Minimize need for painting
− Minimize surface and material wear
 Identify potential areas susceptible to corrosion abrasion
O&M Practices and Techniques

• Unique O&M practices or techniques to be utilized and provided for
in design

• Build O&M documentation from initiation of design
− FMEA and FTA analysis should be included in system and
component maintenance documentation
− Identify all maintenance assumptions and requirements in design
documents and consolidate and track
4-7
• O&M information, including equipment and vendor data, required to be
directly incorporated in the facility asset model [building information
model (BIM)] or database
• Contractual provisions to support long term O&M
− Special warranty or servicing requirements
− Performance contracting requirements
4-8
4.2 Role of a Sound Asset Management System
In my book, “Application of Life Cycle Analysis in the Capital Assets
Industry,” I highlight that life cycle program management is an area of
growing focus and importance across all industries. This life cycle focus
must not only be “cradle to grave” but also holistic, addressing each of the
Triple Bottom Lines. This section looks at one aspect of this life cycle based
program management approach and reflects experience as a provider of a
comprehensive range of asset management services to a broad cross section
of industries. This experience base includes a growing focus on
infrastructure asset management driven by our role in planning, designing,
building, financing, operating and maintaining road and rail systems
delivered under a Public Private Partnership (PPP) model. Under PPP’s, we
assume many of the life cycle roles and responsibilities traditionally solely
within the purview of the public sector.
While our asset management

experience is much more extensive
in various federal government and
industrial facilities, we are seeing a
convergence across all the markets
we serve towards this more holistic,
life cycle approach to capital asset
portfolio design, initial delivery and
the balance of a cradle to grave life
cycle. Importantly, we see this
perspective encompassing all three
of the bottom lines comprising the
Triple Bottom Line we associate with sustainability. The introduction of this
broadened perspective is starting to shift life cycle considerations from a
good business practice to a significant business imperative.
Let me mention one other dimension that is increasingly coming into play
and that is totally reliant on strong asset management practices. This is a
system performance dimension that manifests itself as business continuity in
the private sector but is more closely akin to resilience in public, and for that
matter, privately owned infrastructure.
This section focuses on five questions:
1. What is asset management?

2. What are the characteristics of a sound asset management system?
4-9
3. What impediments or obstacles exist with respect to achieving its
strategic intent?
4. What are the tactical challenges that exist?
5. How do we define and achieve success?
What is Asset Management?

The classical definition of asset management is the management of fixed
capital assets to minimize the total cost of owning and operating them, while
providing the desired level of service at an acceptable level of risk.
Typically, risk is calculated as a cost and often not managed separately.
I will suggest that increasingly this definition will prove inadequate or at the
very least incomplete. We are seeing a shift towards what I would call “life
cycle analysis” where:
• Not only risk but also uncertainty associated with long project delivery
durations and increasingly longer asset lifetimes must be recognized and
reflected in the analysis and management of our capital assets whether
they are a mining operation at 13,000 feet in Peru, a manufacturing
facility producing the nuts and bolts of construction or a new bridge
spanning the Hudson. Are the assumptions we make today assured of
continued validity throughout a 100 year lifetime? How do we provide
and importantly preserve optionality for our capital assets in the face of
an unknowable future?
• Life cycle performance, often measured by life cycle cost, is not a
sufficiently adequate measure of an assets performance but increasingly
must consider its environmental and social performance attributes over
its full lifetime. Nowhere may this be more important than in public
infrastructure where we must find a sweet spot on financial,
environmental and social performance. This change alone suggests an
expanded and increasingly important role for proactive management of
our infrastructure assets.
• The true measure of a well-managed asset is not just one configured to
provide the lowest life cycle cost but rather the highest life cycle
returns. This means delivering an asset that is positioned to serve an
evolving “market” and capture maximum value from that market. This
is important as we consider delivery models such as PPPs. Related to
maximizing returns is the selection and structuring of optimal project
finance models. As we move beyond exclusive use of municipal finance
models to finance our infrastructure, this will grow in importance.
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• System level performance characteristics, in particular resilience of our
infrastructure assets, will be achieved not only through good design but
most importantly how they are operated and maintained. This sustained
resilience is an essential objective of asset management systems in the
near future.
Consider now these two descriptions of an asset management system:
• AASHTO Transportation Subcommittee’s vision for Asset

Management. “… a standard for State DOTs and others for making
investment decisions and managing the nation’s transportation system.
Asset Management should be applied/considered as part of the decision
making process at all levels of an organization.”
• FHWA’s Office of Asset Management. “Asset management reflects
and supports FHWA’s vital few priority areas of Safety, Congestion
Mitigation, and Environmental Stewardship and Streamlining. It
addresses these areas by identifying capacity expansion or system
management alternatives to alleviate congestion and improve mobility,
by incorporating the costs of crashes or incidents in evaluating
transportation alternatives, and by considering the impacts of projects on
the environment.”
Let me suggest that the first impediment to a sound asset management

system may be an inadequate definition of what it is. We must recognize
true success to have any chance of achieving it.
Let’s turn now to our second question.
What are the Characteristics of a Sound Asset Management

System?
The key elements of asset management are:
• A cradle to grave lifecycle approach.

• Developing and implementing cost-effective strategies recognizing the
long-term purpose and nature of these assets.
• Defining, establishing and providing for a defined nature and level
of service.
• Monitoring, maintaining and, where possible, enhancing asset
performance.
• Anticipating, mitigating and managing risks associated with asset
degradation and failures.
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• Implementing asset management to achieve these objectives on a
financial, environmental and societal basis.
• Sustaining and, where possible, enhancing system level characteristics
of an asset such as resiliency, flexibility and future optionality.
• Deploying the limited financial, physical and human resources of the
asset owner in an efficient, effective and sustainable manner. It is about
making informed tradeoffs as part of our decision making process.
• Continuously improving asset management practices.
One final thought is important. Asset management must be not only

systematic but more importantly systemic. Our asset management focus
must consider total asset portfolio performance, not just individual elements.
This is particularly true when we consider higher level system
characteristics such as resilience.
Sound asset management systems exhibit several characteristics:
• Clearly defined and well communicated strategic business objectives

similar to what we see in all well managed programs.
• Executive recognition of the value asset management brings and a
commitment to making it successful.
• Focus on addressing the strategic level impediments that may exist.
• Clarity in identifying and removing the tactical level impediments that
such programs face.
• Recognition of what success looks like.
Asset management, with its strategic focus across an entire asset portfolio
and its use of quality information, foster decision-making process that
encourage preventive strategies rather than reactive “worst-first”
approaches.
4-12
What Impediments or Obstacles Exist with Respect to Achieving
its Strategic Intent?
Major impediments that a
comprehensive asset management
strategy faces can be categorized
simplistically into strategic and
tactical. Of the various strategic
impediments faced, the first,
articulated previously, is a lack of
clarity on what is meant by asset
management. It is not a maintenance
program on steroids!
Rather it is much more, going to the

strategic business objectives of the
asset owner. In considering strategic
impediments, it is useful to consider
“gaps” often encountered in the asset
owner’s approach either when setting
out on implementation or in
programs not delivering adequate results. Let’s look at some of the major
gaps which impede asset management success:
• Vision and executive level support. Importantly, this includes

establishing those strategic business objectives for both the enterprise as
well as the asset management program. These must be supported by
outcome type metrics as well as the more traditional range of KPIs. In
capital program delivery, just one phase of overall asset life cycle, we
see that two thirds of all major programs that fail suffer from inadequate
definition, communication and management of strategic business
objectives. While I am unaware of a comparable study in the asset
management area, it would not surprise me to see comparable findings.
• Creating and resourcing an asset management organization to
implement the asset management plan, provide timely and valuable
input to management decision processes and to learn and continuously
improve the owner’s asset management practices. The establishment of
a dedicated asset management organization represents an insurance
4-13
policy for dealing with “off normal” events since they may best
understand the inherent resiliency in the “system.”
• Stakeholder management. This
begins with clear and
comprehensive identification of
all stakeholder and stakeholder
groups. This is a growing
challenge especially as asset
management must consider not
only financial life cycle
performance but also
environmental, social and a new
cast of financing stakeholders as
new delivery models such as
PPPs are utilized. Stakeholder
communication must
increasingly be synonymous with
engagement at times having to
educate stakeholders as the
complexity of infrastructure
assets and infrastructure “portfolios” increases.
• SMART asset management plan development. Asset management
plans must be Specific, Measurable, Achievable, Realistic and Targeted.
In other words, they must be SMART. They begin with understanding
where you want to get, knowing where you are now, performing an
objective and comprehensive gap analysis, and evaluating alternative
strategies and tactics to close the gaps. Continuously we must ask how
we can change what we do not just how we do it. We need to ensure we
are doing the right things in the best possible way. Recognition that
change is required is essential and understanding the importance of
deliberate and facilitated organizational change management are
important first steps. It is only then that we can finalize the new work
processes required, define the new metrics that will matter most, and
provide the essential training that must go hand in hand with an
organizational change management program.
Let’s look now at the tactical challenges that are faced in implementing an
asset management system.
What are the Tactical Challenges that Exist?

The asset management systems on the market as COTS (commercial off the
shelf) are relatively expensive. Even more so if you want to customize them
4-14
to a particular group of assets and/or integrate them with other systems.
Most of them do not correspond to desired outcomes – the performance
metrics that we are seeing tied to long term infrastructure contracts.
In addition, today’s systems do not include a provision for timeliness

requirements or tracking those items that will generate penalties. This is
comparable to the regulatory or permit compliance challenges faced in
industrial asset management programs.
As infrastructure owners increase their focus on asset management, we see

first steps often centered on putting in place a maintenance management
system (MMS). While this is far short of what is required for comprehensive
asset management, we find that owner’s implementing a MMS or contacting
out maintenance management for the first time are challenged to agreeing on
value adding metrics.
Even when an effective MMS has been identified and demonstrated, it is

capable of efficiently managing and reporting (with outcome oriented
metrics in addition to input styled metrics), agreement with the owner on
those metrics can be challenging.
On existing infrastructure, agreement on the current condition, remaining
service life, investment to attain service life versus analysis for early
replacement, rehabilitation, or other intervention can all be interesting
conversations.
The demarcation between preventive, routine and major maintenance versus

replacement and rehabilitation is grey at best.
And when it comes to technology, this becomes even greyer. The MMS may
indicate that the technology in question is in perfect condition with
remaining service life, but analysis of emerging or next generation
technology may demonstrate that replacement will be more cost effective
than the required preventive maintenance on the older technology while
providing more efficient operations.
The MMS you choose is only as good as the information you have.
Brownfield projects have to have the assets surveyed for location and
condition for input into the system and often maintenance history is not well
documented making investment strategies and maintenance/replacement
plans less precise.
Finally, tactical impediments exist in the use of the system. Unless there are
protocols for data entry and limited users, the data inputs can greatly affect
the value of the data outcomes.
4-15
In a nutshell, when the system works, it can save time, money and enable
good decisions. When it doesn’t, teams develop work arounds or simply
ignore the data. Table 6 summarizes some of the tactical impediments
often encountered.
Table 6 – Common Tactical Impediments to

Asset Management System Implementation
Cost/value of COTS Mapping optimal work processes
Lack of outcomes based User training
performance metrics
Lack of timeliness Integration with other systems
provisions
Lack of regulatory and Selected system does not organize and
permit compliance allow easy visual access to all asset
provisions physical data (i.e. identification, location,
dimensions, material, connectivity,
construction method, environment)
Agreement on current Selected system does not provides the
condition of an asset ability to forecast operations (and
operations costs), maintenance (and
maintenance costs), repairs (and repair
costs), refurbishments (and refurbishment
costs), and replacements (and
replacement costs) and compare
predicted costs to realized costs for
improved decision making
Agreement on remaining Absence of standard procedure for
service life approving capital project spending
Demarcation between Selected system does not contain and
maintenance and allow easy visual access to the required
replacement and cost data necessary for making decisions
rehabilitation (MMS regarding asset spending
perspective)
Technology philosophy and Personnel are not trained according to
transition documented procedures and the
procedures are not regularly audited
Inadequate asset surveys
Inadequate maintenance
records
Weak data entry protocols
Data quality and transition
Limited system users
4-16
An analysis of private transportation company use of asset management
principles and systems highlights several best practices:
• Proactive maintenance is more efficient than “worst-first”

• Coordinating mechanisms between various asset classes must exist
• Workers responsible for making asset management trade-off decisions
require proper education and training in making those decisions
With this as context, let’s look now at how we define success and,
importantly, how do we achieve it.
How Do We Define and Achieve Success?

There is a direct linkage between the principles of asset management and
those of sustainability as highlighted earlier. Sustainability can be defined as
using, developing and protecting resources to meet current needs while
ensuring that future generations can meet their needs. Asset management is
a systematic process of tracking and managing assets and the resources and
activities required to construct, operate and maintain them.
Success is achieved by:
• Linking asset management to the vision or mission of the owner

• Securing sustained political commitment (public sector) and leadership
from executive staff
• Transforming data into useful information for decision-makers
• Facilitating the sharing of information between agency divisions and a
broader stakeholder set
• Maintaining a customer focus
Asset management will add value if done well. National and international
best practices must be adopted and processes and procedures developed and
refined to take advantage of proven methods, creating an asset management
system that is responsive, adaptive, meeting changing business needs
brought about by new technologies or changed regulatory or legislative
requirements.
It must build on existing good management systems and in their absence act
as a catalyst for their creation. Asset management systems must recognize
that we are entering the world of Big Data and our ability to handle
4-17
unstructured as well as structured data opens up new insights and new
possibilities.
Asset management success is when asset management is part of an owner’s

daily work function and it is trusted and more importantly its data seen as
reliable and importantly relied upon for decision making and driving asset
management. We see this today in availability type PPPs where we are
compensated for being able to run a train within say a six minute window or
only paid for every lane-mile available to move traffic.
Asset management processes are

regularly monitored as well as the
data it produces. An effective asset
management system underpins not
only day to day maintenance
activities but longer term strategic
investment decisions. They support
the case for funding requests in ways
not previously possible. As they
demonstrate achievement and
improvement in outcomes, they become fundamental to strategy
development, operational management and reinvestment case development.
Asset by asset reports complement higher level assessments of system

resiliency, a growing concern and focus area not only for infrastructure asset
owners but also for enterprises concerned with business continuity.
Successful asset management programs have:
• A system for ensuring programmed maintenance

• A system for obtaining condition information and programming capital
asset replacements to avoid capacity limitations or sub-optimal system
financial, environmental or societal performance
They have undertaken the foundational work required with respect to:
• Vision and support

− Obtained understanding of program objectives and support from
executive management and higher levels (board, commissions,
political leadership – executive and legislative)
− Establish relationships between levels of service and costs
4-18
• Program organization
− Established asset manager and formally chartered the asset
management organization or team
− Obtained resources necessary to implement and sustain the asset
management program
• Program communications
− Identified key asset management stakeholder groups and identified
their interests
• Program planning
Near-term actions are well defined and address:
• Asset knowledge
− Define the minimum level of detail for an asset (what assets
to track)
− Establish a uniform asset enumeration scheme (asset organization)
− Identify existing assets and related attributes (asset data)
− Identify the probability and consequence of failure of an asset
(asset risk)
− Establish the level of asset management performed (asset
management strategy)
• Asset planning
− Asset planning is important for two reasons:
 A key goal of is reducing asset ownership costs. Asset
management accomplishes this through the classical
plan/act/measure/control cycle. Asset management works by
preparing plans for assets, carrying out the plans, measuring the
results and updating the plans accordingly.
 Having cost of ownership plans for all significant assets means
that the asset owner can accurately forecast aggregate
ownership costs well into the future, giving a solid foundation
for long-range funding plans.
− Asset planning has three objectives:
 Establish short-interval portions of asset plans
 Establish long-interval portions of asset plans
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 Develop procedures to update asset plans
• Asset refurbishment and replacement (R&R):
− Improved R&R planning arising from asset knowledge greatly
improves the quality of capital funding strategies and has three
objectives:
 Improve R&R planning
 Improve R&R analysis
 Ensure R&R actions are properly reflected in financial reporting
Similar to near term actions, well founded asset management programs also
ensure that long-term actions are well founded including:
• Asset development, including achieving these objectives:

− Develop a systematic approach to creating assets
− Consider constructability, maintainability and operability in the
design process
− Require that enumeration schemes be followed by designers and
contractors
− Maximize contractor contribution to asset development
− Prepare asset plans coincident with asset delivery
• Asset operations and maintenance
− Defining required preventative maintenance activities
− Preventative maintenance scheduling
− Performing defined preventative maintenance activities at the
prescribed intervals
− Using indirect condition assessment where cost-effective
− Performing corrective maintenance on a timely basis
− Management of maintenance using a balanced approach between
preventative and corrective maintenance
− Recording maintenance costs on an activity basis, by asset
− Management of operational methods to minimize the combined
costs of O&M
4-20
− Key objectives of asset O&M:
 Proactive safety management
 Track asset failures consistently
 Prioritize work order backlog by risk
• Asset condition monitoring has three goals:
− Define condition monitoring methods
− Define condition monitoring program
− Integrate condition monitoring with other management and work
processes
• Asset financing is facilitated by more readily identifying refurbishment
and replacement needs
• Asset financial reporting has the following two objectives:
− Improve consistency of asset accounting database
− Improve change management procedures in fixed asset records
Successful asset management programs provide strategic and tactical

benefits such as those summarized in Table 7.
Table 7 – Asset Management Benefits

Strategic Tactical
Improved reliability Reduced labor costs
Empowered workforce Reduced materials/spare parts costs
Streamlined organizational Increased productivity
structure
Achieved business case for the Standardized maintenance
improvement investment
Maximized use of existing assets Integration of all software systems
Best practices identified and More efficient scheduling and
made available across asset execution of work
classes; shared with partners
Improved asset availability Eliminated worker complaints
concerning human factors
Reduced time to market Reduction in equipment breakdowns
Reduced inventory costs and Accelerated program development of
shortened inventory turnover maintenance craft training materials
Raised plant capacity and Foundation of basic maintenance
production availability skills
4-21
Strategic Tactical
Made possible national Technology transfer of process
accounts/consolidated specific knowledge and skills
purchasing
Total quality improvement Documentation of maintenance
improvement opportunities
Reduced risk exposure Integration of lean principles into
operational and production work
processes
Reduced non-value activity Shared maintenance expertise and
spares inventory among assets
Preservation of assets through Accurate spare parts inventory
optimal preventive maintenance
program
Reduction in costly equipment CMMS with accurate reorder and
failures and replacements reporting capabilities
Reduced operations costs by Accurate equipment lists for each
optimizing plant layout for O&M location
Improved resource allocation Accurate P&IDs that meet all
regulatory requirements
Developed maintenance Improved safety and hazard
philosophy prevention
4-22
The linkage of plant availability to capital efficiency is self evident. A plant
that performs poorly, being unavailable for production for extended periods
of time, is not providing value for the money. Moving beyond the obvious,
we are immediately faced with several important questions in our quest for
improved capital efficiency:
• What is the desired or targeted level of plant availability?

• What is the confidence level we have ascribed to achieving this level of
availability?
• What is the impact on capital efficiency as plant availability improves or
degrades?
• Has the linkage between reliability and maintainability and resultant
availability been sufficiently explored and optimized?
• Have the differences between equipment/component availability, system
availability and overall plant availability been clearly understood?
• Have sparing decisions been made with plant availability as a significant
consideration?
• Have inventories (discussed in Chapter 6) been sized to reflect desired
plant availability and associated confidence levels?
• Have debottlenecking opportunities been identified from the perspective
of those solutions which maximize plant availability versus component
or system level availability improvements?
• Has capital efficiency been optimized given these and other related
considerations?
5-1
Plant availability is not merely a function of its experienced maintenance
regime but rather influenced by:
• Owner’s sales and marketing program which drives order volumes,

timing, size and mix
• CAPEX stage decisions on component, system and overall plant
reliability levels
• Operating philosophy, practices, training levels and attention to
continuous process improvement
• Supply chain capabilities to efficiently support shutdown and turn
around programs
At the earliest stages of project planning, “optioneering” activities can allow

a large number of plant, system and even component sizes and
configurations to be considered through construction of an overall
simulation model. Simulator models can guide not only optimization
activities but importantly reveal inconsistencies and deficits in system level
models when these models are integrated into a broader simulation. This
integrated modeling will act to highlight areas of sub-optimization but also
constraining assumptions which on closer examination may not be as fixed
as first assumed.
The resultant deeper understanding of embedded or implicit assumptions

becomes important as we consider the long life times of these developed
capital assets and the likelihood that many of these assumptions will likely
migrate over the facilities life.
These simulation models become more granular as we enter the full EPC
stage and in best practice take the form of a RAM or reliability, availability
and maintainability study. RAM studies are not undertaken with the rigor
and frequency one might expect in large capital asset programs seeking
capital efficiency. Beyond the initial EPC stage, RAM studies have a
significant role in prioritizing sustaining capital investments and targeting
value creating debottlenecking activities. RAM studies are discussed more
later in this chapter but can aid at all stages in:
• Identifying potential process bottlenecks

• Estimating component, system and plant availability
• Assessing redundancy, sparing and inventory strategies
• Facilitating scenario analysis around various levers of capital efficiency
5-2
The owner’s EPC contractor can help guide the owner to appropriate
decisions not only on plant availability levels and strategies but also on two
other important aspects of good life cycle performance, namely, flexibility
and resiliency. The latter is a key element of overall business continuity.
5.1 Flexibility as an Element of Capital Efficiency

Flexibility is a key plant configuration driver and is even more important
from an overall portfolio design approach. Often the owner has pre-
determined the approach to facility design without due consideration of the
value of flexibility in overall capital efficiency determination. Such
determinations involve sales and marketing input that goes beyond singular
“plant capacity” numbers that guide many designs.
Flexibility in plant design can take many forms as shown in Table 8. These
decisions may influence plant layouts and execution methodologies and thus
must be considered at this earliest stage.
Table 8 – Flexibility in Plant Design

Advantages Disadvantages
Phased design Small unit expansion Economies of
defers capital costs. scale may be
Construction efficiency in lost.
subsequent units may
reflect “learnings” from the
prior unit as well as
contractor team learning
curve related productivity
gains (if sequencing of
units supports sustaining a
dedicated build team).
Modular design (not to Flexibility is built in at the Layout penalties
be confused with the use plant, system and even may be incurred
of modules in component level to for certain
construction) achieve a layered “plug aspects of
and play” configuration. modularity.
(Examples – water
treatment plant has simple
interfaces that allow it to
be replaced in kind with a
different technology or
vendor at a later stage;
pump flanges have been
situated to accommodate
a wide range of potential
vendors facilitating vendor
5-3
substitution at a later
stage; digital signals from
plant instrumentation
facilitate alternative signal
processing and later stage
predictive analytics without
replacing sensors).
Design for expansion Provisions for subsequent Initial cost
capacity expansions penalty must be
provided for in base evaluated in
design (Example – a light of likely
manufacturing plant with timing of
two process trains and subsequent
provision for third provided expansion of
for in plant envelope and capacity and
NPI). impacts such an
expansion would
have on initial
phase
operations.
Platform design Flexible framework which Design
provides for a wide range optimization for
of process lines to be any particular
determined at a later product line is
stage. traded off for
Platform design elements broader system
will include foundation, flexibility to more
building envelope, directly support
environmental control the sales and
systems and flexible non marketing
process infrastructure elements of
(NPI) such as power, capital
water, communications efficiency.
and control backbones.
(Example – manufacturing
plants with different
“annual” models;
technology industries
experiencing rapid
changes in fundamental
technologies but where
technology trajectory is
somewhat predictable
such as in semi-conductor
manufacturing).
Platform design may also
5-4
be applied to large
infrastructure systems at
critical, difficult to replicate
nodes such as the
replacement for the
Tappan Zee Bridge which
provides capacity for the
future addition for transit
even though no initial built
of that feature is
contemplated.
Adapted from “Flexibility in Engineering Design;” Richard de Neufville
and Stefan Scholtes; The MIT Press 2011
Decisions on flexibility are not obvious but have an important role to play in
making capital efficiency decisions. This is where “optioneering” can play
an important role as we consider how to best pull the plant availability lever
of capital efficiency. It is important to recognize that plant availability is a
life cycle consideration not just a point in time consideration.
Let’s look at a generic example of how consideration of flexibility can

influence project capital efficiency including the overall plant availability
level as feedstock pricing and volumes uncertainty are considered.
Table 9 – How Flexibility Influences Capital Efficiency

Base Design Low Increased
(Fixed Flexibility Flexibility
Assumptions) Design; Design; Higher
Lower Cost Cost
NPV 1315 1440 1486
NPV Std. Deviation 456 534 264
NPV (P10) 573 493 1261
NPV (P90) 2058 1814 1837
PV of Life Cycle 1610 1101 1550
Cost
CAPEX 1000 670 942
Adapted from “Flexibility in Engineering Design;” Richard de Neufville
and Stefan Scholtes; The MIT Press 2011
5-5
For this nominal $1 billion (CAPEX) project we see that in the instance
where low levels of uncertainty exist with respect to feedstock pricing and
volumes we are likely to realize the fixed assumptions in the base design
and achieve the P90 NPV of 2058. However as feedstock pricing and
volumes vary from those made in the fixed assumption case, we find the
flexible design options to offer potential CAPEX, life cycle cost and NPV
advantages.
As the preceding table reflects, design flexibility is a fundamental design

basis and does not necessarily need to be CAPEX adding. The consideration
of the level of flexibility in plant design however must be underpinned by
more than good intentions and direction. It must be supported by more
robust analysis and this brings us back to RAM.
5.2 Reliability, Availability & Maintainability

Let’s turn our focus now for a deeper look at reliability, availability and
maintainability and its role in improving capital efficiency.
What is RAM?
Simply, RAM stands for Reliability, Availability & Maintainability. It is
essential to understand that a RAM study looks at all three aspects in tandem
and thus plant availability is influenced by:
• System design choices, such as those related to desired levels of

flexibility
• Component, equipment and system level reliabilities and how the
various systems impact each other
• Maintenance time frames and frequency
RAM studies allow us to see how each plant asset contributes to overall
plant availability and then consider options that result in higher capital
efficiency. In simplest terms:
5-6
Maintainability addresses the durations experienced in unplanned outages
and must reflect restore time not just repair time.
Restore time includes:
• Administrative delay time, influenced by operating practices,

maintenance organization and supply chain effectiveness. Two major
elements of administrative delay include:
− Spare parts delay
− Maintenance delay
• Repair time consisting of:
− Access time, influenced by design provisions for high frequency,
high value maintenance items
− Diagnosis, often influenced by decisions on instrumentation, extent
of CAPEX phase information captured in the operating asset model,
and level of training or ready access to skilled experts
− Repair time, influenced by tooling and design provisions for access
or use of temporary maintenance equipment
− Replace time, driven by:
 Sparing decisions
 Supply chain efficiency
 Planned replacement provisions incorporated into design
 Access to supplementary equipment and labor as required
5-7
− Verification, acceptance and component and system level testing
before restoration to production operations.
• Startup time
RAM studies can provide early guidance on potential plant availability and
highlight areas where alternative system configuration or equipment choices
should be considered. Constraining systems and equipment can be identified
and optimization and improvement strategies identified.
Specifically, RAM studies can increase plant availability through

recommendations on:
• Addition of spares
• Equipment selection guided to more reliable types where important
• Addition of bypasses and lockout provisions as appropriate
• Maintenance and testing practices and frequency of both standby and
inventoried redundant equipment
• Commissioning and installation materials and equipment to be retained
for subsequent maintenance and restoration operations
• Added protection requirements to improve plant availability (filters,
strainers, protective coverings, temperature sensors associated with
supplementary cooling)
• Quality assurance and acceptance testing
5-8
Inventories are a major opportunity area with respect to achieving capital
efficiency and are often not adequately focused on at the project
development stage. Today’s LEAN business processes and operations make
this a critical aspect of not only plant capacity but also operational flexibility
and business continuity. Inventories involve costs, both those associated
with initial inventory acquisition but also sustaining costs associated with
preventing inventory degradation. A key element in optimizing plant
inventory levels begins with the supply chain driven design decisions and
the associated procurement and supply chain decisions made at the EPC
stage. In this chapter, we will briefly explore these aspects of driving
inventories to optimal levels but will not cover some of the more traditional
aspects of inventory optimization associated linkages with marketing and
sales campaigns and incentives.
Inventory Optimization Begins at the Design Stage

Inventory optimization begins at the project’s design stage. It is here where
we consider tradeoffs and make design decisions related to:
• Throughput capacity
• Number of process trains
• Required operating margins
• Initial, intermediate and final storage and surge requirements
• Non-process infrastructure design and ownership models
• Operating and maintenance philosophy and strategies
Supply chain capabilities of the owner’s EPC become critical in ensuring a
broader supply chain discussion occurs within the owner’s organization and
6-1
the owner’s sustaining supply approach has been considered in plant design
and EPC supply chain decisions.
Capital efficiency pressures facing all industries are driving us to an

increased focus on “fit-for-purpose” design and an associated reduction in
layered “design margins.” These actions reduce CAPEX but also reduce the
inherent capacity and margins of plants from what an owner may have
previously experienced, thus increasing the importance of understanding
required inventory levels.
The use of advanced modularization concepts and associated “tighter” plant

layouts may influence decision making on intermediate stage inventory
levels and influence process sizing and designs on number of process trains.
Standardization practices adopted at the earliest design stage may effectively

limit spare part and consumable inventory requirements, positively
influencing overall plant capital efficiency in a number of ways.
Increasingly, non-process infrastructure, defined here as including power,

water and the associated plant logistical chain (road, rail, port), are
experiencing higher degrees of uncertainty as these vital supply chain links:
• Become taxed as plant usage grows.

• Degrade as the result of under investment by responsible third parties
(national and local governments; port and road authorities; private rail,
port and road operators).
• Experience competition for capacity from other existing and later
developed or expanded projects.
Design stage strategies may offer confidence building approaches through
consideration of:
• Creation of project dedicated infrastructure.

• Co-investment with existing infrastructure providers.
• Alternative ownership and service delivery models that act to take
capital intensive project elements “off balance sheet” and translate them
to a pay for performance basis. Particular opportunities exist with
respect to power and water dimensions of today’s projects.
Inventory Optimization is Strongly Shaped at the EPC Stage
As we move into the EPC phase, we make supply chain decisions which
may drive life cycle supply chain direction and flexibility, including:
6-2
• Number of SKUs embedded in the plant and maintenance supplies and
spares
• Implicit logistical chains including exposure to common infrastructure
choke points
• Limitations on available substitutions
• Source country supplier risks
Standardization decisions made at the earliest design stages may now be
translated to more granular applications and are a function of the linkage
within the owner’s EPC of supply chain and engineering and construction
functions. Let’s look at some opportunities to reduce inventories through
supply decisions made at the EPC stage.
• Small motors limited to three sizes from a singular manufacturer with

common components across the family of motors
− Motor spares limited to three types and depending on supply chain
resiliency and speed the number of onsite spares may be limited to
one or even none. The situation on motor spares is exacerbated in a
multi-vendor situation or one with a large number of alternative
sizes.
− Concerns on single vendor supply can be addressed at this stage as
well with a conscious tradeoff process occurring. The key is early
supply chain engagement to ensure these decisions are deliberate
and well thought out.
• Filters and lubricants can be coordinated across similar component
types, reducing the need for inventories on a wide range of filters and
lubricants while reducing the chance of the wrong consumable
component being used
• Nuts, bolts and other common fittings and associated tool sets. This was
touched upon in Chapter 4, and many of the standardization drivers for
the CAPEX phase can be extended into OPEX and inventory
considerations.
Logistical constraints experienced in the CAPEX phase may be harbingers
of operating or later life cycle constraints. CAPEX stage solutions
considered by the EPC should be further tested for OPEX relevance but
explicitly considering the extent to which these logistical constraints
influence required inventory levels. These inventory levels may be
associated with feed stocks of various types as well as intermediate or
finished products to ensure an ability to address logistical uncertainties. The
consideration of inventory-related factors is not regularly addressed, and
6-3
often CAPEX stage solutions have not been evaluated for potential OPEX
applicability.
Many sites are logistically constrained but well served by major elements of
the supply chain. In these instances, vendor maintenance of inventories
either directly contracted for or implicit in a supply contract with stringent
delivery regimes can act to reduce CAPEX and OPEX phase inventory
requirements.
EPC stage decisions can result in elements of the project having limited or
no substitution options. These supply chain decisions have potential impacts
on plant risk levels which are often mitigated through inventory-based
decisions as part of a broader business continuity evaluation. Material
tradeoff studies, especially for feedstocks and consumables, need to
recognize the inventory implications and costs of decisions made on
specialty or hard to source materials.
Strategic global sourcing decisions made during the EPC stage must be
evaluated for longer term relevance as cost advantages between sourced and
other markets will likely change over the life of the capital asset. In those
instances where CAPEX is the dominant life cycle cost, these evaluations
may be less important. But, in some instances, life cycle costs for a system
or component are dominated by the operating phase costs. Short and
medium term source market cost trajectories can influence inventories,
potentially allowing them to be used as natural hedging strategies.
Finally, integration of vendor data, at an appropriate level of granularity into

the developed building information model (BIM) or its equivalent, can
provide insight into spares and inventory requirements as procurement
activities advance.
Inventory Optimization Benefits from Strongly Founded

Sustaining Capital Programs
Major capital assets are not merely built and then maintained. There is a
significant sustaining capital effort required to sustain these facilities in
good operating order. It is not unusual to see company-wide sustaining
capital investments that equal or surpass those associated with new
greenfield project capacity. Each of these sustaining capital programs
represents a significant opportunity to improve inventory optimization by
prioritizing investments that:
• Reduce inventory requirements through plant and process
debottlenecking at all process stages
• Increase fill rates, reducing requirements for sustained onsite storage
6-4
• Maximize or balance plant capacities both across multiple associated
plants but also across process lines in a given plant and, importantly,
between asynchronous process stages such as the interface experienced
between batch and continuous processes
• Address non-process infrastructure bottlenecks influencing inventory
levels
Efficiently operating plants are often associated with reduced working
capital requirements as a result of quicker inventory turnover. Required
inventories to deal with common plant bottlenecks are reduced; therefore
working capital advantages must be included in project prioritization for
sustaining capital investments.
System fill rates can be adjusted to influence onsite storage and inventory
requirements, replacing these capabilities with just in time deliveries or on
demand flows. Decisions in this regard should be made at the earliest design
stage but may also be positively addressed as part of subsequent sustaining
capital investments.
Plant capacities and operating modes must reflect a broader plant portfolio
as well as whether the owner’s operating philosophy is principally a “push”
or “pull” one. The role of inventories that act as buffers changes under each
model. The mining industry utilizes both models with different buffering
strategies with associated differences in inventory costs as an example. Like
all costs associated with capital efficiency, inventories are just one of the
levers we must consider.
Required inventory levels are also influenced by the strength of the coupling
across the supply chain and the owner’s visibility into this supply chain. The
EPC stage represents an optimal point to gain multi-level visibility and
insight into the degree of coupling that exists. In tightly coupled supply
chains, all partners may accrue benefits in the form of reduced inventory
requirements through coordination of the timing of plant shut down and
major maintenance activities.
6-5
Sound project management is about meeting the challenges of scale and
complexity but also about capturing the opportunities of leverage. Every
major program, as well as the projects that comprise it, is the subject of a
detailed and rigorous risk analysis. This is not only appropriate but also
necessary. But in order to capture the full value inherent in large programs
and projects, we must seek out opportunities in a proactive and ongoing
manner.
This opportunity analysis is best constructed within a framework that

ensures a comprehensive view of all aspects of the program. Unlike various
risk frameworks and categorizations that exist, there is no comparable
opportunity framework for program management in the engineering and
construction industry. This chapter outlines one possible framework that
draws on the “Ten Types of Innovation” by Doblin Research and presents
an initial checklist to facilitate opportunity assessment in large engineering
and construction programs.
Program Management Opportunity Framework

The Program Management Opportunity Framework utilizes a construct
similar to that used by Doblin in “Ten Types of Innovation” but with a
distinctive focus on those parameters related to opportunities in large
engineering and construction programs. In the Program Management
Opportunity Framework, four broad categories of opportunities are
considered:
• Finance • Projects
• Processes • Stakeholders
7-1
Within these broad categories, a total of 10 sub-areas are described. These
sub-areas and principle area of interest include:
1. Business Model How to fund the program and individual

projects; maximize return on investment
2. Networking Optimizing the value chain
3. Enabling Process Streamlining owner driven processes
4. Core Process Applying proprietary PMC processes and
intellectual property
5.Program Performance Implementing PMC value improving
practices
6. Program System Adopting life cycle services framework
7. Program Teamwork Adopting strong alignment and partnering
approaches
8. Outreach How stakeholders are engaged
9. Communication How program benefits are communicated
to stakeholders
10.Stakeholder Experience How positive stakeholder experience is
achieved
An Opportunity Checklist
The opportunity checklist for any specific large scale engineering and
construction program will be governed by:
• Nature of program and its individual projects

7-2
• Client related constraints
• Site constraints
• Market constraints
• Supply chain and logistical constraints
• Governmental, regulatory and stakeholder constraints
• Additional program specific constraints
The following checklist is suggestive of the breadth of opportunities which

may exist in large capital programs. While important opportunities do exist
in the “nuts and bolts” of large engineering and construction programs, more
valuable opportunities may exist in modifications to the business models
used or how stakeholder expectations are met.
Opportunity Checklist
1. Business Model. How to fund the program and individual projects;
maximize return on investment
− Are there elements of the program or individual projects for which
attractive vendor financing is available?
− Are there elements of the program or individual projects which
should be acquired on other than a purchase basis (examples:
DBOM, PPP, delivered service)?
− What is the optimal phasing of the program when considering phase
based revenues and costs?
− Are there program or individual project structuring opportunities
that improve the project's tax efficiency?
− Are there risk categories which can be pooled and self-insured?
− Are there changes in the owner's business model or the PMC
delivery model which are desirable based on program
considerations?
− Do commodity or risk arbitrage opportunities exist?
− Do opportunities exist for favorable regulatory change?
7-3
2. Networking. Optimizing the value chain
− Which elements of supply lend themselves to consolidated
purchasing?
− Which elements of supply should be considered as part of a broader
multi-project procurement strategy?
− Is the scope of the program or individual projects to be developed
by the owner optimal or are there elements to be added or subtracted
that can produce better value?
− Are their potential alliance agreements that should be considered
that create value for both parties?
− Has potential value in waste or by-product streams been fully
captured?
− What co-development opportunities exist with projects being
undertaken by others?
− Does reorganization of the supply chain provide added value or risk
transfer?
3. Enabling Process. Streamlining owner driven processes
− Are there owner tollgate processes which can be accelerated through
interim reviews?
− Are there opportunities to embed owner staff with change authority
into site management teams for routine type changes?
− Are there opportunities to modify contingency pool policies to
provide both the owner's and PMC's project team with increased
flexibility?
− Are there elements of procurement and contracting which can be
better undertaken directly by the PMC versus the owner's typical
procurement approach?
− Are their opportunities to accelerate cash flow to contractors and
suppliers through a modified invoice payment process (only
exceptions not paid)?
− Can staff approval processes be streamlined for in-budget staff
positions within approved ranges?
7-4
4. Core Process. Applying proprietary PMC processes and intellectual
property
− Are required IP agreements in place in a form that maximizes the
opportunity to use proprietary PMC processes and intellectual
property?
− Use PMC's integrated framework without any defaults to client
preference systems?
− Is there the potential to use PMC strategic supplier relationship
agreements?
− Is an external version of PMC's risk framework utilized?
5. Program Performance. Implementing PMC value improving practices
− Have we identified the most appropriate value improving practices
and their timing to be used on the program?
− Are there technology options we should currently be considering?
− Are the classes of quality for each portion of the program or
individual projects consistent with its intended use and associated
risks?
− Are there opportunities for pre-fabrication, pre-assembly and
modularization that improve labor productivity and reduce costs?
− Has standardization been considered from a full life cycle
perspective (procurement and construction simplification, reduced
sku’s for spares)?
− Are there opportunities to use lower cost engineering centers for an
increased portion of the program?
− Have opportunities to minimize construction waste been adequately
considered (recyclable packaging materials, onsite re-use of select
waste streams, reduced number of sku’s in supply chain)?
− Are strategies for reducing energy use during construction in place
(consolidated shipments to the site, renewable energy to meet onsite
construction power needs, use of micro grids)?
− Are strategies for minimizing potable water use during construction
in place?
7-5
− Have water "barter" arrangements been considered to reduce limits
on well pumping rates?
− Have design margins been optimized?
− What opportunities for energy and water operation during
operations exist?
− Are value creation and value awareness activities being adequately
harvested for improvements?
− Can productivity be enhanced through training, tools or other
workforce changes?
6. Program System. Adopting life cycle services framework
− Are there opportunities to streamline start-up and commissioning,
including pre-commissioning of elements of the project?
− Have O&M needs been addressed in project design?
− Have O&M needs with respect to consumables and spares been
addressed in initial project procurement?
− Is it desirable for the PMC to provide an initial or ongoing
maintenance activity for all or part of the project?
− Does the approach to design, procurement and construction result in
an asset management database suitable for plant operations and
maintenance?
7. Program Teamwork. Adopting strong alignment and partnering
approaches
− Have alignment activities been carried out comprehensively across
owner, PMC and all stakeholder organizations?
− Are regular partnering session continued throughout the program
duration?
8. Outreach. How stakeholders are engaged
− Have stakeholder management plans been developed and do they
reflect the preferred method each stakeholder desires to engage
through?
− Are we monitoring and assessing stakeholder engagement and
providing feedback to stakeholders on their engagement?
7-6
9. Communication. How program benefits are communicated to
stakeholders
− Are we using the most cost effective communication techniques to
reach each stakeholder with appropriately targeted messages?
− How can we better measure effectiveness?
10. Stakeholder Experience. How positive stakeholder experience is
achieved
− Have we solicited each stakeholder's definition of success and
measured and communicated the program's movement towards that
goal?
Conclusion
Large scale programs are faced with significant challenges of scale and
complexity. They also offer a wide range of opportunities to better leverage
existing and new models, practices and processes. Capturing and
capitalizing on these opportunities can benefit from a structured and
ongoing examination of opportunities much in the same way as risk are
systematically identified, assessed and managed.
7-7
Throughout this book, we have explored five of the levers available to asset
owners to improve capital efficiency. The focus has been on those levers
that exist in the areas where owner organizations often engage EPC and
other contractors to execute work and included:
• Schedule
• CAPEX
• OPEX
• Plant Availability
• Inventories (Supply Chain Design)
As we have seen, the scope for improvement is significant.
Let’s recap what we saw with respect to each of these levers.
8-1
Schedule improvements improve capital efficiency by lowering the interest
costs associated with the construction phase while generating revenue at an
earlier point in time. Additionally, schedule certainty is important to owners
and is one of their three primary concerns (together with capital certainty
and capital efficiency). The owner’s EPC can significantly impact schedule
in three significant ways:
• Optimizing his work process to simplify and, where possible, eliminate

steps in the project execution process while incorporating added
considerations related to an expanded basis of design (BODX),
innovation and continuous improvement.
• Modify work processes to reflect construction driven execution needs,
including work process changes needed to support increased fabrication
efforts to better control quality, cost and schedule. Fabrication strategies
can drive plant layout for example while shifting labor from a field
setting to a more manufacturing like environment.
• Improving measurement and understanding of the root causes of rework
during the engineering and construction phases to reduce the time and
cost, including disruption, associated with rework. This is facilitated to
the extent that owner work process requirements are not driving bespoke
project execution processes which are not as easily benchmarked.
Included in this effort is an improved understanding of RFI drivers and
implementation of a continuous improvement process to reduce RFIs.
8-2
CAPEX or capital cost improvements begin by realizing that approximately
10% of CAPEX is related to engineering and 90% related to procurement
and construction. The owner’s EPC can significantly impact CAPEX costs
in five principle ways:
• Ensure the developed design basis meets owner’s project requirements

(OPR) without undue contingencies, redundancies or factors of safety.
This entails ensuring that our design basis documents (baseline centric
documents) have been sufficiently challenged from this “scope control”
perspective and that subsequent reviews are not unduly conservative.
Said another way, the design is fit for purpose.
• Ensure that the appropriate level of design is undertaken to reflect the
delivery form selected for the project (design build may require less
detailed design for off-sites, infrastructure and utilities). Further,
challenge and eliminate non value-adding engineering process steps and
simplify others where possible. This mind set of fit for purpose
execution processes and continuous process improvement is essential to
driving the CAPEX dimension of capital efficiency.
• Drive down construction costs by ensuring construction is an integral
part of the basis of design. This is accomplished through development of
a construction basis of design (CBOD) coincident with addressing the
owner’s project requirements (OPR). This is much more than
constructability. Project execution processes must be reconfigured to
reflect this element of an expanded basis of design. A framework for a
construction basis of design was laid out in “Addressing Project Capital
Efficiency through a Business Basis of Design” (PM World Journal;
8-3
Vol. III, Issue IV, April 2014) and is included as Appendix 1 for
completeness.
• Ensure supply chain strategies that drive lower CAPEX costs are fully
supported by modified work processes and the client contracting and
project organizations.
• Enhance confidence levels associated with early stage estimates to
improve capital certainty (one of three primary concerns expressed by
owners together with schedule certainty and capital efficiency). This
supports cost certain or cost incentivized contracts.
8-4
OPEX improvements begin by recognizing that at least 50% of life cycle
cost is associated with operating and maintenance phase expenditures. When
feedstock and fuel costs are considered these numbers may be significantly
higher. The owner’s EPC can impact this element of capital efficiency by
including in an expanded basis of design the O&M factors, which should
drive plant life cycle design. Like the CBOD described in Chapter 3, the
O&MBOD will complement and complete the OPR. Depending on the
strength of the owner’s O&M organization and the timely, sustained
participation of senior operating and maintenance managers and experts, this
basis of design may be by the owner.
Taken together, the CBOD and O&MBOD are referred to as an expanded

basis of design (BODX) or a business basis of design. Our initial thinking
on an O&MBOD framework was also laid out in “Addressing Project
Capital Efficiency through a Business Basis of Design” (PM World Journal;
Vol. III, Issue IV, April 2014) and is include in Appendix 2 for
completeness.
8-5
This is addressed primarily through the O&MBOD described in the previous
section but may also include potential life cycle (PPP type) offerings. Other
influencers may include:
1. Decisions on the number of equipment or process trains

2. Operating practices with respect to “in-service” maintenance activities
3. Influence of multi-plant economic dispatch business models
The last two are more squarely within the owner’s domain.
8-6
Inventory requirements can impact overall capital efficiency and are
influenced by design and supply chain decisions that address inventory
requirements for efficient operations.
More significant will be the potential benefits leveraged from alternative

supply chain relationships and contracting strategies.
Inventory levels are also significantly influenced by the degree of

standardization incorporated in the capital asset.
8-7
Capital Efficiency is Key to Project Execution
Focusing on capital efficiency and the value it can bring drives alignment
across all participants in a capital assets life cycle. This includes the owner’s
project development organization, his EPC, contracts and legal, operations
and finance. Within the EPC organization, it drives a fundamental shift in
what is designed, how it is designed and the sequence and packaging of
design. Through frameworks such as the expanded basis of design, BODX,
we inculcate not only capital efficiency considerations but support a culture
of innovation and continuous improvement.
8-8
Ackermann, Fran., Susan Howick, Colin Eden and Terry Williams.
Understanding the causes and consequences of disruption and delay in
complex projects: how system dynamics can help.
Center for Advanced Infrastructure and Transportation. March 27, 2013.
Impediments for Implementing a Sound Asset Management System. State of
Good Repair Summit.
Flyvbjerg, Bent. 2006. “From Nobel Prize To Project Management: Getting
Risks Right.” Project Management Journal (August). Aalborg University.
Jones, Reginald M. Lost Productivity: Claims for the Cumulative Impact of
Multiple Change Orders.
Kahneman and Tversky. 1979. "Prospect theory: An analysis of decisions
under risk." Econometrica.
Kahneman, Daniel. 2011. Thinking, Fast and Slow.
Knowles, Roger. The Cost Of Delay And Disruption.
Neufville, Richard de., and Stefan Scholtes. 2011. “Flexibility in
Engineering Design.” The MIT Press.
Prieto, Bob. 2011. CMAA. The GIGA Factor; Program Management in the
Engineering & Construction Industry.
Prieto, Bob. 2012. “Application of Life Cycle Analysis in the Capital Assets
Industry.” PM World Today.
Prieto, Bob. 2012. “How Radically will Project Execution Change: A 7DSM
Future.” CMAA Future Focus.
Prieto, Bob. 2013. Application of Life Cycle Analysis in the Capital Assets
Industry. Construction Management Association of America (CMAA).
9-1
Prieto, Bob. 2014. “Addressing Project Capital Efficiency through a
Business Basis of Design.” PM World Journal 3 (4)
Prieto, Bob. 2014. Life Cycle Analysis – a 7DSM Future. National Institute
of Building Sciences.
Ryals, Clay. “Delay and Disruption Analysis on Technology-Driven
Projects.” Navigant.
Weaver, Patrick. FAICD, MCIOB, PMP. Delay, Disruption and
Acceleration Costs.
Williams., Eden, Ackermann, and Tait. 1995. “The effects of design
changes and delays on project costs.” Journal of the Operational Research
Society. 46 (7) 809-818
Williams Jr., Gerald H. Construction Research, Inc. Use of a Production
Function to estimate the impact of work fragmentation on labor
productivity.
9-2
General
strategies, tactics, techniques and tools
• Construction labor, skills, equipment, materials of construction and
logistical constraints to be reflected in basis of design
• Unique requirements that reflects owner or contractor preferences such
as:
− Prior experience of the owner
− Unique risks, opportunities or constraints associated with the project
− Contractor capabilities and experience
− Special tools uniquely available to the project
− Broader programmatic objectives required of the owner or
independently committed to by the owner that influences
construction execution.
− Applicable safety program to be used on project
Specific
CBOD considerations may be broadly grouped as basis of design
• Labor
• Equipment
• Materials
A1-1
• Means & methods
Labor
• Sourcing
• Safety – Hazard elimination and mitigation
• Knowledge
• Welfare
• Productivity
Equipment
• Procurement
• Logistics
• Installation
Materials
• Preferred material sources
• Material tracking
• Preferred logistical approach
• Onsite material activities
Means & Methods
• Focus on design impacting elements of construction
• Strategies
− Reduce indirects
− Reduce need for enabling works
− Modularization/fabrication with appropriate metrics
− Requirements for offsite construction
• Tactics
− Reduce temporary works
− Minimize excavations
• Techniques
• Tools – Unique equipment to be employed
A1-2
• Owner’s policies, guidelines or other directives affecting construction
• Regulatory limitations on construction practices, means & methods
• Desired sequence of construction
• RFI reduction
• Sustainability
− Construction energy, water and waste requirements
• Commissioning – Provisions to be reflected in design
• Workface planning
A1-3
General
• Operations and maintenance (O&M) process that influence design
• O&M labor, skills, equipment, materials (including consumables)
temporary provisions for maintenance to be reflected in basis of design
• Unique requirements such as:
− Contracting community capabilities and experience
− Special tools required for major maintenance
− Broader programmatic objectives required of the owner or
independently committed to by the owner that influences
maintenance execution.
− Applicable safety program to be used during facility operation
Specific
O&MBOD considerations may be broadly grouped as basis of design
• Labor
• Equipment
• Materials
• O&M practices and techniques
A2-1
Labor
• Sourcing
• Safety
• Knowledge
• Productivity
Equipment
• Maintenance – Provisions’ combinations, accessibility and minimization
• Repair – Minimization of spare types
• Replacement
Materials – Minimize maintenance
O&M practices and techniques that are unique
Management processes and practices
• Documentation
• Asset management
• Contractual provisions to support long term O&M
A2-2
Daniel Kahneman’s recent book, “Thinking, Fast and Slow” returned his
concept of the “planning fallacy” to the project management center stage
when considering large, complex projects and programs. First coined by
Kahneman and Amos Tversky in a 1979 paper, the planning fallacy is the
tendency of people and organizations to underestimate how long a task will
take even when they have experience of similar tasks over running.
Perhaps the poster children for the planning fallacy are large scale public
works projects. In a 2006 paper in the Project Management Journal, Bent
Flyvbjerg describes transportation projects “inaccuracy in cost forecasts in
constant prices is on average 44.7% for rail, 33.8% for bridges and tunnels,
and 20.4% for roads.”
Work by Kahneman, Tversky, Flyvbjerg and others show that errors of

judgment are:
• Systematic and predictable

• Reflect bias
• Persist even when we are aware of
• Require corrective measures that reflect recognition of this bias
These natural tendencies are further exacerbated when “motivated”

individuals frame questions in such a way as to constrain the range of
possible answers.
Consider these two situations. In the first, a manager is given responsibility

to come up with a budget and schedule for a large project. He engages
outside help, conducts a thorough risk analysis and looks at comparable
other projects. In the second a manager is asked by the politically appointed
A3-1
Chairman of the Authority if he can do the same project for $XX. Which
answer are you more comfortable with?
Reference class forecasting is one method for suspending one’s impressions

and providing a more critical evaluation of the task at hand. It addresses the
natural tendency to underestimate costs, completion times and risks while at
the same time overestimating benefits. It squeezes out biases while
considering the inevitable “improbable” risks that all projects face. The risks
that inhabit the “white space” between elements of a program and possibly
even the odd “Black Swan” that shows up from time to time.
The Association for the Advancement of Cost Engineering (AACE) has

recognized the value of estimate validation using separate empirical-based
evaluations to benchmark the base estimate, the equivalent of reference
based forecasting. This estimate benchmarking process is widely used in the
process industries but need not be constrained to them.
Reference Class Forecasting

Let’s look at an example at how reference class forecasting can be used not
only to provide a basis for checking planned execution approaches and
associated project timelines but also to identify how the execution
methodology and, in this case, even the contracting strategy will need to be
modified.
The particular project of interest was the pacing element of a larger

program. The methodology described below was also extended to the
complete program and identified several added changes to the program
methodology which would be required.
The reference class forecast began by identifying a comparable scale similar

type project for which there was a good information database and
performance was well documented. That project was in the later stages of
completion and actual schedule performance through the majority of the
project was already known. The schedule for this reference project is
reflected in Figure 1. Project activities and dates have been generalized for
purposes of this example.
While the design of the new project clearly will be different, it was judged
that in terms of supply chain, complexity and scale those differences were
not significant and that the reference class forecast undertaken would
provide a good initial indicator of project durations and contract delivery
strategies.
A3-2
Figure 1
A3-3
The next step in developing a reference case based forecast was to overlay
the project schedule against the then “current” calendar so that likely end
dates could be forecast. This is shown in Figure 2. Initial activities pacing
the schedule are related to design activities which in the reference case were
completed before construction was started.
A3-4
Figure 2
A3-5
As can be seen in Figure 3, construction was anticipated to be complete at
the end of the first quarter of 2019 if a comparable design development and
contracting approach was utilized. The client’s target date of mid-2017, also
reflected in Figure 3, was 21 months earlier. The initial project execution
strategy envisioned engaging a singular design-build contractor, but this
initial reference class forecasting step highlighted that this would not
achieve the required 21 month schedule reduction.
A3-6
Figure 3
A3-7
This set the stage for developing an alternative contracting and delivery
approach that would provide a better founded basis for project delivery.
The development of the alternative approach began with sliding required

construction activities forward such that the actual construction durations
required could still be available to the program although it was clear that
they would have to be contracted for in a very different manner. This is
reflected in the Figure 4.
A3-8
Figure 4
A3-9
Attention then turned to assessing how the project execution methodology
would have to be modified. Initial modifications included pulling back the
tendering for construction package activity (Figure 5) and recognizing that
the project would not be in a position to begin any aspect of that activity
until a later date (Figure 6).
Given the fast track nature of the program and the complexity of the project,
we incorporated an extended industry comment and engagement period
(Figure 7) and reflected a later mobilization of the main contractor
consistent with this procurement and engagement process (Figure 8).
A3-10
Figure 5
A3-11
Figure 6
A3-12
Figure 7
A3-13
Figure 8
A3-14
In parallel to the main contractor engagement and selection process, it was
identified that engagement (Figure 9) of shop drawing activities and
development of shop practices would have to begin (Figure 10) in order to
support the overall schedule. It would be the intent to transfer these
contracts to the main contractor when selected.
Finally, an assessment would be made of shortlisted main contractor’s

specialized construction equipment and technology capabilities and if
necessary procurement (Figure 11) of such equipment to be treated as client
furnished material made at the time of shortlisting.
A3-15
Figure 9
A3-16
Figure 10
A3-17
Figure 11
A3-18
Conclusion
Optimism is a wonderful trait and a key attribute of the human condition.
But in developing a sound planning basis for large, complex projects, we
must redouble our efforts to control this at times unavoidable bias. If we fail
to recognize and limit the effects of “framing questions” and the so-called
planning fallacy, we are doomed to an endless series of “surprises” related
to project cost and schedule.
Key to controlling this planning bias is:
• Assumption articulation and tracking. Assumptions must be explicit,

tested, confirmed and importantly monitored. In highly complex and
long term projects assumption migration is a regular occurrence.
• Consideration of all risks. No matter how improbable, that could
adversely impact the project or program plan – “framing questions” and
an optimism bias often lead us to assume away risks leading to a failure
of not only developing management strategies and contingencies, but
even worse, failing to track them further.
• Directly addressing the bias through use of reference class
forecasting. This provides separate empirical-based evaluation –
reference class forecasting provides a neutral ruler against which to
measure our planning efforts.
A3-19

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CAPITAL

All rights reserved. No part of this publication may be reproduced or

Printed in the United States of America

This book exposes readers to the notional underpinnings of a “business basis

CMAA’s continued support of my professional efforts is welcomed and

Senior Vice President

Princeton, New Jersey, USA

Bob Prieto is a senior vice president of Fluor,

Bob is a member of the ASCE Industry Leaders Council, National Academy

Strategic Program Management

Topics in Strategic Program Management

The GIGA Factor; Program Management in the

Application of Life Cycle Analysis in the Capital

Chapter 5 Plant Availability

Chapter 7 Opportunity Analysis

Appendix 2 BODX Checklist – O&M Basis of Design

Appendix 3 Managing the Planning Fallacy

(Rio Tinto) “to scale back capital spending to bolster economic

(Dow) “Our focus on operating and capital efficiency gives us flexibility to

(Merrill Lynch on Exxon Mobile) “we view relative changes in capital

There are a myriad of definitions used when describing capital efficiency.

A common definition used is Return on Invested Capital, or ROIC, defined

What are the Components of Capital Efficiency and Who and

Let’s look at each in turn.

Improving Operating Margins

Where, NOPAT is:

Earnings Before Interest and Taxes (EBIT) =

Revenue – Operating Expenses (OPEX), including feedstock and energy

Non-operating income, losses

Income tax provision

Interest expense x tax rate

Non-operating income, losses x tax rate

(Function of plant performance and availability)

The asset owner can directly influence Operating Margin through:

• Interest expense (through CAPEX schedule which may play through to

Invested capital turnover is defined as:

Invested Capital Turnover = Sales/Invested Capital

Where Invested Capital =

Operating Working Capital (current assets (includes inventories) – current

The owner’s EPC has an opportunity to influence:

• Plant availability (influencing sales levels)

The other levers associated with capital efficiency include:

and are not addressed further in this book.

These five areas are each covered in subsequent chapters.

• Lack of readiness by the owner’s organization to undertake the project

Other schedule influencing factors during the CAPEX stage will be

2.1 Owner’s Readiness Index

The ORI is structured to consider major questions in the following areas:

• Owner readiness with respect to an individual program and associated

Owner Readiness with Respect to Program and Associated

• Poorly defined or articulated vision, mission and top level objectives

If clearly defined strategic business objectives and clear and continuous

Strategy must be supported by transparent and substantiated top-level

• Program demand related forecasts

Managers of large programs must do more than just be aware of the

Execution frameworks greatly impact program success and as part of

• Business model, scenarios and relationship to program

Risk and opportunity identification, assessment and management are key

Finally, owner readiness with respect to an individual program and

• Capability of owner’s technology platforms to support the program are

Program Objectives and Criteria

Additionally, the scope of supply and services including associated

This articulation and integration of owner’s philosophies must encompass a

• Asset flexibility, availability, reliability and resiliency