Industrial Megaprojects E-Book

Edward W. Merrow

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 771

Veröffentlichungsjahr: 2024

Beschreibung

The most up-to-date edition of the bestselling text on megaprojects

In the newly revised second edition of Industrial Megaprojects Revisited: Concepts, Strategies, and Practices for Success, 2nd Edition , veteran megaproject valuator Edward Merrow delivers an accessible and authoritative discussion of why megaprojects frequently go over budget, past their deadlines, or result in safety compromises. You’ll explore project management deficiencies, destructive team dynamics, weak accountability systems, short-term biases, and technical expertise gaps and, more importantly, learn how to avoid or address these pitfalls in the real world.

This latest edition offers extensive new material on renewable energy and decarbonization projects, as well as:

• Clear, nontechnical explanations of why major projects tend to get into trouble
• Strategies to avoid hazardous and costly errors in the high-stakes megaproject environment
• A comprehensive collection of tools, tips, principles, and frameworks to take a megaproject from start to finish without compromising on safety, blowing the budget, or exceeding the deadline

An essential resource for engineers and industry professionals and executives, Industrial Megaprojects remains the gold standard on the subject. It also belongs in the libraries of finance and banking professionals who regularly fund these projects, and academics who research them.

Leseprobe

Table of Contents

Cover

Table of Contents

Title Page

Copyright

Dedication

Preface

Acknowledgments

Why Megaprojects Fail So Often—Seven Key Mistakes

1. I want to keep it all!

2. I want it

NOW!

3. Don't worry, we'll work out the details of the deal later.

4. Why do we have to spend so much up front?

5. We need to shave 20% off that number!

6. The contractors should carry the risk; they're doing the project!

7. Fire those #$@$^! project managers who overrun our projects!

PART 1: Success Is Elusive

CHAPTER 1: Megaprojects—Creators and Destroyers of Capital

Who Should Read This Book?

What Is an Industrial Megaproject?

Why Study These Projects?

The Organization of This Book

Respecting Confidentiality

Notes

CHAPTER 2: Data and Methods

The Timing of Data Acquisition

The Data Collection Process

The IPA Megaprojects Database

Methodology

Some Methodological Notes

Notes

CHAPTER 3: Project Outcomes and Trends

Cost

Schedule

Production

Trading Outcomes

What about Construction Safety?

The Jemima Principle

Success and Industrial Sector

Trends: What Has Changed Since the First Edition?

Notes

CHAPTER 4: The Roads to Ruin—The Mechanics of Failure (and Success)

Cascading Failures

Basic Data Failures

Failure from Fear

Cost-Reduction Debacles

Schedule Slip Is the Slayer of Megaprojects

The Pathway to Success

Notes

PART 2: The Three Work Streams

CHAPTER 5: An Introduction to the Shaping Stream

Why Is Shaping Essential?

The Five Steps in the Shaping Process

A Shaping Nightmare

Notes

CHAPTER 6: Shaping Step 1—Understand the Context

Country Advance Teams

1. The Physical Location

2. History of Prior Projects in the Area

3. The Nature and Perceived Value of the Physical Environment

4. The Political and Institutional Environment

5. Regulatory Climate and Stability

6. Local Content Requirements

7. Social, Religious, and Cultural Considerations

8. Local Labor Availability and Quality

9. Competing Projects

Notes

CHAPTER 7: The Next Steps—From Context Knowledge to Project Shape

Step 2: Assess the Potential Value

Step 3: Identify Comparative Advantage

Step 4: Identify, Understand, and Align the Stakeholders

Step 5: Getting Rules Straight with Partners

Shaping Challenges in Renewable Energy Projects

Notes

CHAPTER 8: Devising the Shaping Strategy

If ya don't know where you're goin', you might end up some place else

Conceptualizing Shaping

Kill Criteria

Achieving Final Closure

Real Options: Another Way of Thinking about Shaping

When Should Shaping End?

Linking Opportunity Shaping with Project Development

How Shaping Errors and Omissions Lead to Failure

Misguided Trade-Offs

An Example of Successful Opportunity Shaping

An Example of Unsuccessful Opportunity Shaping

Notes

CHAPTER 9: Basic Data Are Basic

Processing Facilities Basic Data

Petroleum Production Projects Basic Data

Basic Data Requirements for Minerals Developments

Basic Data Requirements for Expansion and Modernization Projects

What Are the Consequences of Basic Data Errors?

When Should the Basic Data Be Complete and Available?

Under What Circumstances Are the Basic Data Most Likely to Be Incorrect?

Root Causes of Basic Data Errors

The Basic Data Protocol as an Antidote to Failure

Notes

CHAPTER 10: Project Definition—Getting the Front-End Right

What Is FEL?

Assessing the Scope Development Phases

Assessing FEL-3

Why Is Complete FEL So Important?

How Well Are Megaprojects Front-End Loaded?

Why Isn't FEL Better?

FEL and the Project Context

How Long Should FEL Take?

Sectoral Challenges to Good Front-End Work

A Final Comment on Megaproject FEL

Notes

PART 3: People Do Projects

CHAPTER 11: Megaprojects Teams

Team Precursors

Key Team Topics

Special Challenges for Megaproject Teams

Can Weak-Matrixed Teams Do Successful Megaprojects?

Notes

CHAPTER 12: Organizing Megaproject Teams

Complexity Is the Nemesis of Megaproject Organization

The Role of Organization Charts

Thinking about Organizational Approach

Structuring Megaproject Organizations

Alternative Organizational Models

What about Programs?

Notes

PART 4: Getting It Done

CHAPTER 13: Contracting

Contracting Approaches

Frequency of Use in Megaprojects

Contracts and Project Outcomes

The Central Issues in Contracting Strategy

The Role of External Financing on Contract Approach

What Drives Success and Failure in EPC-LS Contracting?

Reimbursable Contracts Are for Higher-Risk Projects

The Use of Incentive Schemes

Why Megaproject Alliances/Integrated Project Delivery Fail

Why Split Form Contracting Succeeds

The Use of a Project Managing Contractor (PMC)

Owners and Contractors Live in Different Worlds

Notes

CHAPTER 14: The Control of Execution Risk

Controls Must Start Early

Priorities for Monitoring and Control

Megaproject Survival in Labor-Short Environments

Risk Management Practices

Risk Modeling: A Tale of Two Practices

Reading the Tea Leaves: Key Warning Signs of Trouble Ahead

Maintaining Value

Notes

PART 5: Finishing Up

CHAPTER 15: Project Governance

Why Is Good Governance So Difficult?

The Role of Stage-Gates

Who Should Own Governance?

Alternative Governance Models

Governance Is Important

Notes

CHAPTER 16: Focus on Success

Address the Business-Technical Divide

Formalize and Institutionalize the Shaping Process

Develop the Team Staffing Strategy

Remember, Front-End Loading (FEL) Is Still the World's Best Capital Investment

Restore Professionalism (and Sanity) to the Owner-Contractor Relationship

Toward More Successful Megaprojects

Glossary and Acronyms

Index

End User License Agreement

List of Tables

Chapter 2

TABLE 2.1 Types of Projects Represented in Database

TABLE 2.2 Industrial Sector Representation

TABLE 2.3 Test Results Noted in Text and Footnotes

Chapter 3

TABLE 3.1 Five Dimensions of Project Effectiveness

TABLE 3.2 Location Is Important in Reporting of Construction Safety

Chapter 4

TABLE 4.1 Drivers of Success and Failure in Projects with CREs

Chapter 6

TABLE 6.1 When Permitting Problems Occur

Chapter 9

TABLE 9.1

Chapter 10

TABLE 10.1 Remoteness and FEL Effort

TABLE 10.2 Difficulties and Success Rate

Chapter 11

TABLE 11.1 Failure and Turnover

List of Illustrations

Chapter 2

FIGURE 2.1 Project Work Process

FIGURE 2.2 Global Distribution of the Project Sample

FIGURE 2.3 Technological Innovation Embodied in a Project

Chapter 3

FIGURE 3.1 The Trade-Off Picture for Megaprojects

FIGURE 3.2 Failed versus Successful Projects

FIGURE 3.3 Operability Failures

FIGURE 3.4 Success Is Trending Upward

FIGURE 3.5 Cost Growth and Schedule Slip Are Declining

FIGURE 3.6 Cost Competitiveness of Megaprojects

FIGURE 3.7 Operability Failures Are Declining

Chapter 4

FIGURE 4.1 Cascading Failure

FIGURE 4.2 Relative Outcomes of Projects with/without CRE

FIGURE 4.3 When Execution Schedule Slips

Chapter 6

FIGURE 6.1 Remote Projects Suffer Worse Outcomes

FIGURE 6.2 Corruption Perceptions Index © Transparency International

FIGURE 6.3 Percent of Projects with Local Content Issues in Shaping by Regio...

Chapter 7

FIGURE 7.1 High Discount Rates Discourage Long Projects

FIGURE 7.2 Endowment and Context Establish Approximate Value in Early Shapin...

FIGURE 7.3 Clear Objectives Start the Causal Path to Success

FIGURE 7.4 Clarity of Project Objectives Drives Team Quality

Chapter 8

FIGURE 8.1 The Typical Phased and Gated Project Work Process

FIGURE 8.2 Sensitivity of Rate of Return to Changes in Capital Cost, Schedul...

Chapter 9

FIGURE 9.1 The Chemistry of an Industrial Seawater Cooling System

FIGURE 9.2 Timing of Basic Data Arrival Changes Project Results

FIGURE 9.3 New Technology and Production Startup

FIGURE 9.4 Operability Risks Increase with Technology Step-Out

Chapter 10

FIGURE 10.1 FEL in Context

FIGURE 10.2 From Shaping to Frame

FIGURE 10.3 FEL 2 Assessment and Index

FIGURE 10.4 FEL 3 Authorization Gate FEL Index

FIGURE 10.5 FEL Index: Both FEL 2 and FEL 3 Are Reported on a Single Scale

FIGURE 10.6 FEL Drives Cost Predictability

FIGURE 10.7 FEL Drives Schedule Predictability

FIGURE 10.8 FEL Reduces Operability Problems

FIGURE 10.9 Execution Planning Improves Safety

FIGURE 10.10 Relationship between the FEL Index and Successful Project

FIGURE 10.11 How Well Are Megaprojects Defined at FID?

FIGURE 10.12 Team Integration Is the Critical Enabler

FIGURE 10.13 Permitting Problems Create Havoc

FIGURE 10.14 Permitting Definition Is Good Investment

FIGURE 10.15 FEL Takes Longer for Larger Megaprojects

FIGURE 10.16 E&P Versus Other Megaproject Results

FIGURE 10.17 E&P Successes Versus Failures: Striking Difference in Performan...

FIGURE 10.18 Complete FEL Is More Important for Petroleum Development Megapr...

FIGURE 10.19 E&P Permitting Is Deficient

FIGURE 10.20 The ABCs of E&P Megaproject Failure

Chapter 11

FIGURE 11.1 Alternative Team Reporting Structures

FIGURE 11.2 Functional Leads in Core Team

FIGURE 11.3 Integrated Teams Do Better Megaprojects

FIGURE 11.4 Integrated Owner Teams Do Better FEL

FIGURE 11.5 The Project Team Changes Its Size and Composition as the Project...

FIGURE 11.6 Sponsor's Role Is Accountability for Business Value of the Asset...

Chapter 12

FIGURE 12.1 Scattered Team Members Increase Complexity

FIGURE 12.2 The Hub and Satellite Model

FIGURE 12.3 The Organic Development Model

Chapter 13

FIGURE 13.1 Frequency of Contract Approaches

FIGURE 13.2 Success and Failure Rate for Contract Approaches

FIGURE 13.3 Outcome Differences by Contract Strategy

FIGURE 13.4 Considerations for Contracting Decisions

Chapter 14

FIGURE 14.1 FEL Drives Detailed Engineering Slip

FIGURE 14.2 The Downward Labor Productivity Spiral

FIGURE 14.3 Scheduling Detail Is Critical in Labor-Short Environments

FIGURE 14.4 Resource Loading Is the Best Curb on Schedule Optimism

FIGURE 14.5 In Offshore Projects, Fabrication Work Carried Offshore Explodes...

FIGURE 14.6 Monte Carlo Cost Contingencies Are Unrelated to Risk

Guide

Cover

Title Page

Copyright

Dedication

Preface

Acknowledgments

Why Megaprojects Fail So Often—Seven Key Mistakes

Table of Contents

Begin Reading

Glossary and Acronyms

Index

End User License Agreement

Pages

iii

iv

v

ix

x

xi

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

95

96

97

98

99

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

150

151

152

153

154

155

156

157

158

159

160

161

162

163

164

165

166

167

168

169

170

171

172

173

174

175

176

177

178

179

180

181

182

183

184

185

186

187

188

189

190

191

192

193

194

195

196

197

198

199

200

201

202

203

204

205

207

208

209

210

211

212

213

214

215

216

217

218

219

220

221

222

223

224

225

226

227

228

229

230

231

232

233

235

236

237

238

239

240

241

242

243

244

245

246

247

248

249

250

251

252

253

254

255

256

257

258

259

260

261

262

263

264

265

266

267

268

269

270

271

272

273

274

275

276

277

278

279

280

281

282

283

284

285

286

287

288

289

290

291

292

293

294

295

296

297

298

299

300

301

302

303

304

305

306

307

308

309

310

311

312

313

314

315

316

317

318

319

320

321

322

323

324

325

326

327

328

329

330

331

332

333

334

335

336

337

338

339

340

341

342

343

344

345

346

347

348

349

350

351

353

355

356

357

358

359

360

361

362

363

364

365

366

367

368

369

370

371

372

373

374

375

376

377

378

379

380

381

382

383

384

385

386

387

388

389

390

391

392

393

394

395

396

397

398

399

400

401

402

403

404

405

406

407

408

409

410

411

412

413

414

415

416

417

418

419

420

421

422

423

424

425

426

427

428

429

430

431

432

433

434

435

437

438

439

440

441

442

443

444

445

446

447

448

449

450

451

452

453

454

455

456

457

459

460

461

462

463

464

465

466

467

468

469

470

471

472

473

474

475

476

477

478

479

480

FULLY REVISED & UPDATED EDITION

Edward W. Merrow

industrial megaprojects

CONCEPTS, STRATEGIES, AND PRACTICES FOR SUCCESS

SECOND EDITION

Copyright © 2024 by Edward W. Merrow. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permission.

Trademarks: Wiley and the Wiley logo are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries and may not be used without written permission. All other trademarks are the property of their respective owners. John Wiley & Sons, Inc. is not associated with any product or vendor mentioned in this book.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic formats. For more information about Wiley products, visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data is available:

ISBN 9781119893172 (cloth)ISBN 9781119893189 (epub)ISBN 9781119893196 (epdf)

Cover Design: WileyCover Images: © Photocreo Bednarek /Adobe Stock Photos, © Karl Hendon/Getty Images, © WangAnQi/Getty ImagesAuthor Photo: © Stephanie Dupuis Photography

For Justin

Preface

It seems to me that we live in a vastly more complex world today than in 2010 when I wrote the first edition of Industrial Megaprojects. The industrial projects landscape has changed significantly due to the need to address climate change as de-carbonization requirements add a wholly new dimension to assessing what is a good project outcome. Renewable energy projects and carbon capture projects will have to be an integral part of our immediate future in the hundreds or thousands if the warming of the planet is to be slowed. A very large fraction of those projects will be megaprojects. If humanity decides not to combat climate change in a serious and concerted way, there will be hundreds or even thousands of megaprojects to attempt to combat the damage that climate change will cause. Megaprojects will feature heavily in our future either way.

The other big change since 2010 has been the Covid pandemic and its aftermath. It will be many years before historians will be able to realistically assess the effects of the pandemic, but we already know that it changed project work very substantially. The pandemic hastened the demographic cliff that project organizations and owners and contractors were already facing. The pandemic also has changed the way teams work; the usual format in 2024 is a hybrid in-person and virtual model. That model may be working well enough for most activities, but it is not working well for projects. Projects, like many sports, is a deeply team-based activity. Teams always work better together.

In this edition of Industrial Megaprojects, I try to reflect how the world has changed in the new emphases in the book. I spend much more space on the role of Shaping in project success and failure because projects aimed at mitigating climate change turn out to be very “Shaping heavy.” Shaping is the process of allocating the value of a project out to the stakeholders in a way that achieves agreement that the project can go forward. Shaping shapes “the deal” around which every major project ultimately depends. Unless society moves quickly to make the Shaping of energy transition projects achievable, we will fail this critical test and jeopardize our futures.

I also spend more space on project teams and what makes them tick. If the business case for a project is strong and the objectives are coherent, the success or failure of the project depends on the abilities of the owner team and how well it is led. If the owner team is able to do its required part to prepare a project well, the contractor teams will rarely fail.

The other major section added to this edition is Chapter 4, which addresses the mechanisms by which megaprojects actually fail when they do. This is to correct an oversight in the first edition. I realized shortly after its publication that I had only talked around the mechanisms of failure rather than fully exploring the subject. I am hoping that Chapter 4 remedies that oversight.

Since the first edition, megaprojects have improved significantly. The rate of success as we define success has more than doubled in the years after the first five-year period of this century. It is unfortunate that the baseline success rate was not quite 20%. For the sake of the investors in these projects, the teams that develop and execute them and the societies in which they are built, my Independent Project Analysis, Inc. (IPA) colleagues and I very much hope that this book will play some part, however small, in generating another doubling of success from here forward.

Acknowledgments

This book records some of the history of large complex industrial projects that make the things on which modern societies depend. Many thousands of people contributed in ways large and small to the projects that we have studied here. I especially want to thank and acknowledge the hundreds of owner teams that spent countless hours assembling data for Independent Project Analysis, Inc. (IPA) analysts and research staff and answering thousands of questions. Without your contributions there is no database and histories from which to assemble this book. This book is, above all, written for you.

I also acknowledge the essential role of my colleagues at IPA who visited project teams and sites in all corners of the world to assemble the incredibly rich data, information, and knowledge behind the 760 projects included in the database. By asking the right questions and asking again when things didn't make sense, the IPA staff made this book possible.

I thank my IPA colleagues who read and commented on sections of this new edition. I especially want to thank Luke Wallace, the director of IPA's Projects Research Division, and Anish Kalro, a member of Luke's staff, for their invaluable assistance in putting together the database that was essential for this book. My thanks also to Kelli Ratliff, product delivery manager at IPA, for sorting out and constructing all of the figures and illustrations that help tell the story. And last but not least, thanks to the Wiley staff for once again being patient and quickly turning around things.

Why Megaprojects Fail So Often—Seven Key Mistakes

By way of introducing the reader to the strange world of megaprojects, I am starting by discussing seven critical mistakes that I have seen most often in my 40 years of studying these projects, first at The Rand Corporation, and then for the last 35 years, at Independent Project Analysis (IPA). If you are responsible for a megaproject right now, try to ask yourself, “Am I now in the process of making one of these whopper blunders?”

After outlining how to do large projects well to the executive committee of a large company, the CEO asked me an obvious question: “Given that all of this is rather straightforward [he actually said “smashingly banal”], why can't we do it?” The answer was one he anticipated and feared: “Because you are incapable of generating the kind of deep cooperation within the company that is necessary to do these projects well.” Most of the big mistakes that companies make in developing and executing these projects stem from a basic lack of being able to pursue a common goal with clarity and good behavior.

This book is mostly about mistakes, often masked with the bravado of “taking daring risks,” but in the end, just plain mistakes. So, I thought it appropriate to start our discussion of megaprojects with seven whopper mistakes that doomed too many of these projects from the start. For the most part, the engineers on these projects tend to make little mistakes, although some of them occasionally cascade into disaster. Most big mistakes are made by senior business managers in the sponsoring firms. The reason they make most of the big mistakes is because they have control of the things that matter most: strategy, money, and people. In most megaproject development, the most important single relationship among the many thousands of relationships involved is the one between the business director for the project and the project manager, often called the project director.

So here are my top Sorry Seven.

1. I want to keep it all!

In days of yore, greed was considered a bad thing, even in business, because greed was liable to get us into trouble. I am pleased to report that in megaprojects, greed still works that way. When companies approach these projects with a view of trying to take as much of the pie as they possibly can, they lose sight of an essential element in making the project succeed: the allocation of the project's potential value in a way that provides a stable foundation on which the project can be executed. This will be a primary subject of Chapter 5. Working a deal that will be seen as essentially unfair to other stakeholders will tend to backfire. Greed generates an imbalance in the distribution of cost and rewards of the project.

Most commonly, a project with a greedy lead sponsor falls apart in the development (Shaping) phase, so we end up with nothing rather than all of it. In other cases, the project proceeds, but those who feel they have been treated unfairly never let go of their opposition. They then add turbulence to the project environment, giving project directors more trouble than they can manage. By their nature, megaprojects often suffer with turbulent project environments. Adding to that turbulence is a recipe for failure.

2. I want it NOW!

Schedule pressure dooms more megaprojects than any other single factor. When there is pressure to quickly move along a project from the outset, corners get cut and opportunists have a field day.

A classic case was a group of difficult deepwater petroleum developments that was put on a fast track when the CEO mentioned in a meeting with the financial community that the projects would go into production on a particular date. The project community's reaction within the company was “It can't be done!” but that didn't deter an ambitious vice president who saw an opportunity to ingratiate himself with the boss. He then set up a “daring and ambitious” program with an inexperienced contractor to deliver the projects in 70% of industry average time at 70% of industry average cost. The result was a program overrun of several billions of dollars, and the largest and most important project was a fully four years late and $2 billion to $3 billion overrun. (We will never know for sure how much!)

No project should ever be deliberately slow. (If it really doesn't make any difference when the project is completed, you probably shouldn't be doing the project now anyway.) But taking risks with megaproject schedules is a fool's game. Every megaproject has an appropriate pace at which the project can be developed and executed successfully. Furthermore, that pace is known with a fair degree of confidence early on if good practice is followed. If the economics of the project require an accelerated schedule, then the appropriate conclusion is that project is uneconomic and should not be done. Unlike smaller projects, megaprojects cannot be used to “fill in a gap” in your production or “meet a market window.” When the calendar rather than the needs of the project drives the schedule, the project fails. We return to the issue of fast-tracking megaprojects in numerous places in the chapters to follow.

3. Don't worry, we'll work out the details of the deal later.

As a megaproject director friend of mine likes to say: “The deal drives the project; the project can't drive the deal!” I would add that the project can drive the deal, but it never turns out to be a good deal. The business deal and the project have to develop together and inform each other, but the deal governs. The deal establishes the parameters and the priorities for the project. The deal determines the relative importance of capital cost versus operating cost and cost versus schedule. The deal also determines how big the scope can be.

Many megaprojects center on a deal between a resource holder, for example, petroleum, minerals deposit, and so on, and a company with the technical expertise to develop that resource and sell the product. The basic contours of the deal between the resource holder and the resource developer must be decided quite early in the front-end development of the project. The deal is what will ultimately shape how money will be made as well as how it will be divided. In the absence of the deal, the project is directionless. If project development continues without the deal informing its shape, the chances that the deal will never be struck increase. Furthermore, if the potential partners cannot agree fairly quickly on the shape of the deal, there may be something terribly amiss. Let me cite an egregious example.

A European company was developing a large project (~$7 billion) in the Middle East with a resource holder. The idea was that the resource holder would provide the feedstock at a discounted rate to promote industrialization and job creation; however, the negotiations over the formula for this went nowhere while the project was busy being developed and defined. When we challenged the rationality of this situation with the company executive driving the deal, we were brushed aside with a “You don't understand the Middle East.” Finally, the invitations to bid were issued and over $250 million of the company's money had been spent and the board of directors finally required a deal or no authorization. When there was no deal forthcoming, the company was forced to cancel the project and eat the loss. What was going on? The resource holder didn't actually have the feedstock and exploration efforts were coming up empty. Not wanting to lose face (and make their resource situation known to the world), they dragged their feet until the sponsor quit. They then publicly blamed the sponsor for killing the project and being an unreliable and untrustworthy company! And who is it exactly who doesn't know the Middle East?

4. Why do we have to spend so much up front?

Every project professional worthy of the title knows that skimping on the front-end definition of a project is stupid. When it comes to the biggest and most important projects that we do, we routinely skimp on the front-end. Megaprojects—with so much at stake—are routinely less well defined at authorization than smaller, less important projects. The primary reasons are time (see preceding mistake No. 2) and money (see preceding mistake No. 1).

Depending on the specifics of the project, doing a thorough job defining and planning an industrial megaproject takes 3% to 5% of eventual total capital cost. Let's be clear: on a megaproject, that is a lot of money. The cost, however, of not spending the money is much, much more.

Senior managers are understandably concerned that if they spend, say, $100 million and the project is canceled, they are stuck with the bill. Even worse, from their perspective the $100 million is expense, not capital, and is therefore deducted immediately from earnings. However, when senior managers are faced with this situation as a realistic possibility, it is symptomatic of other problems.

Sometimes managers find themselves in this risk of loss position because the resource holder has deliberately set them up. Some resource holders want no decision points between the initial “memorandum of understanding” (which has no binding effect) and the full-funds authorization of the project. This is a simple bargaining ploy: if I can get them to spend enough money, they are locked into the project whether or not they really want to be. This is a psychological example of the forward-going economics trap—that is, “throwing good money after bad.”

At other times, senior managers can find themselves in this dilemma because the cost of the project was not understood at the necessary and appropriate time. As we will discuss at some length later, the eventual cost of the project should be known with a fair degree of assurance when only about 1% of total cost has been expended, not 3% to 5%. If management doesn't have the stomach for spending 1% as pure risk money, they should not play the game. Spending that front-end money well is the subject of Chapter 10.

5. We need to shave 20% off that number!

One of the most counterproductive exercises in megaprojects is the “cost reduction task force” responding to management's admonition to significantly reduce the cost of the project, usually within a few months of full-funds authorization. I have literally heard a vice president say, “You guys [meaning the project team] need to sharpen your pencils and get a billion dollars out of that estimate!” Those must be magic pencils because in the real world, the cost of a project is inextricably linked to its scope, which in turn is a reflection of its intended functionality. Unless I change the scope, which means that some functionality has to give way, I cannot really change the cost estimate. But to change the scope would require another year or two before we are ready to authorize the project, which is, of course, unacceptable because of preceding mistake No. 2.

So project teams in this situation do one of two things: (1) they change the assumptions underlying the estimate such as the cost and productivity of labor, prices for equipment, and so on; or (2) they actually cut the scope knowing that it will all have to come back later to achieve the needed performance of the project. Either way, they are headed for a big overrun and the savviest among them will be preparing to post their resumes so as not to be caught up in the scapegoating that will surely occur later.

6. The contractors should carry the risk; they're doing the project!

A majority of megaprojects in most parts of the world are executed on some form of fixed-price contracts between the sponsors and one or more prime contractors. Rather than project professionals, the preference for fixed-price (lump-sum) contracting almost always comes from the business leadership or from the banks financing the projects. Their belief is that the contractual form will transfer the cost (and often schedule) risk from the sponsors to the prime contractor(s). And every once in a while, it actually does! Most of the time, however, relatively little risk is actually passed, but a substantial premium is paid nonetheless.

There is a simple and unavoidable problem with wholesale risk transfer from sponsors to contractors: the contractors cannot actually carry the risk on a megaproject. The firms that engineer and construct industrial projects are variable-cost ones with very little in the way of fixed assets. Their balance sheets are not loaded with capital assets, and generally, the cash they have on the balance sheet is needed for working purposes. They earn by selling the services of people rather than via the production and sale of products. This simply means they cannot possibly carry the kinds of losses that can and do occur on megaprojects. As a consequence, given the preference of business leaders and banks for lump-sum contracts, the engineering and construction firms have become very adept at taking on lump sums with loopholes or bidding so high that the risk is manageable.

Most of Chapter 13 takes up the issue of how to match the contracts to the situation rather than the situation to the contracts. However, the belief that fixed price contracts establish a ceiling on what sponsors will pay for a project is to completely confuse a ceiling and a floor. No sponsor has ever paid less than the value of the lump-sum contract, but many, many a sponsor has paid much more.

7. Fire those #$@$^! project managers who overrun our projects!

Beating up project managers who overrun capital projects is a blood sport that certainly dates back to the Great Pyramids. However, it's a bit of fun that comes with a very high price tag for the business.

I have been looking at capital projects now for over 40 years. I have met hundreds of project directors and managers of all sorts and descriptions. I have yet to meet one who starts the day by asking, “What can I do today to screw up my project?” I have met some project directors who struck me as hopelessly incompetent, but very few of those were working on megaprojects. Large cost overruns on major projects can almost never be honestly laid at the door of the project director.

I will never forget a very long morning I spent with the CEO of a large international oil company. Much of our discussion that morning focused on why it was inappropriate and counterproductive for him to personally browbeat project managers who overran the company's projects. I finally concluded the discussion this way: “If you beat up the project managers for overruns, they will find ways to hide money so you can never find it. If they don't, you have hired a bunch of morons. And morons don't do projects well either!” As I walked down the corridor after the meeting, the vice president responsible for Exploration and Production turned to me and said, “Ed, now you see what we're up against.” I left that day knowing that I had lost the argument, and 15 years later, the company's engineering department, led by a former contractor, focuses most of its effort on finding where the project directors have hidden the money.

The preceding seven mega-mistakes are not mutually exclusive; they can and do show up together in many combinations. However, any one is usually sufficient to doom a project to failure.

PART 1Success Is Elusive

It is difficult to write a short book about megaprojects. Megaprojects have many more salient features than smaller projects. By salient, I mean aspects of the projects that may well turn out to be the basis for failure. For a megaproject to go well, a great many things must go well and nothing can go very poorly. Megaprojects are political. Megaprojects tax sponsor organizations and contractors. Megaprojects are usually technically complex and often innovative. Such features tend to be occasional with smaller projects. They sometimes get caught up in local or company politics, but not usually. If they are very complex technically, that is often the only respect in which they are challenging. For megaprojects, lots of challenges usually are present as a set, but often in a configuration that most of those involved have never seen before.

Part 1 does several things that are essential for understanding the rest of the book. First, I define what constitutes success and failure. Those definitions will be used throughout the book in every case in which the terms success and failure are used. In the course of defining success and failure, I also explain why I decided to define them as binary rather than as existing on a set of scales. The reason is that megaprojects tend to actually sort out in a binary way and that is quite important to understanding the projects.

Second, in Chapter 3, we will review what has changed and what has stayed the same in the 13 years since the first edition was published. Part of the impetus to write this second edition was to see if we learned anything after the disastrous first set of about 100 megaprojects we authorized in the first five years of the 21st century. We did learn; I wish that we had learned more, faster.

The third big subject of this introductory part of the book is contained in Chapter 4, which discusses the concrete mechanisms by which megaprojects fail when they do. When viewed from the proper perspective, there are actually only a few ways in which the projects fail, and one mechanism, cascading failure, is by far the most common. If practitioners can get sensitized to look for the early signs of cascade failures, the outcomes might be improved dramatically.

The final big point that I hope readers note is that a lot of megaprojects are, in fact, very successful ventures. The number of successes is far too many to be a matter of luck, and all of the analysis in this book points away from luck playing much of a role in megaproject success. One of my disappointments with the first edition was that some readers came away with the impression that I said that megaprojects were bound to fail when that was far from the truth. Yes, there are more megaproject failures than successes. But very few of the failures were inevitable; almost all were preventable by the project sponsors. But if a sponsor is passive and expects success without having to work very hard and smart, then failure is, in fact, inevitable for them. Megaprojects are bloodsport; the timid or the lazy should not apply.

CHAPTER 1Megaprojects—Creators and Destroyers of Capital

Megaprojects are important in the grand scheme of things. Industrial megaprojects provide most of the things necessary for life on a planet with 8 billion humans and counting: energy, metals, chemicals, pharmaceuticals, seeds and food. When the projects are done well, they accelerate economic development and security. But it is also no secret that megaprojects are the most uncomfortable subject in the management of projects.

As a project management community, we have struggled to develop and execute these large complex projects with anything approaching consistent success. I first looked at these projects systematically in 1988 as a researcher at the Rand Corporation.1 I found a story of large cost overruns on projects that were often delivered so late that their original purpose no longer existed. When I revisited the subject 22 years later, it was with a much deeper and better nuanced database that my colleagues and I had assembled through years of evaluating projects at Independent Project Analysis (IPA).2 In that long interval depressingly little had changed. There was, however, a glimmer of hope in 2011 that was nowhere in sight in 1988: a number of large complex industrial projects were brilliant successes, a number far greater than two decades before. Those projects demonstrated that success was not a matter of luck or circumstance, but a product of deep and collaborative planning by the owners leading the projects.

In the 12 years since publication of Industrial Megaprojects, a great deal has changed. Today's world seems much further removed from 2011 than 2011 was from 1988. We have entered in earnest what promises to be a long crisis period around climate change. Renewables megaprojects have become common and will coexist with oil and gas projects and other megaprojects for years to come. All major projects in most parts of the world have to navigate the requirements of sustainability along with the mandate to be profitable. Local content requirements have proliferated and become increasingly complex in the past decade. We have lived through our first global pandemic in a hundred years, which changed both the projects landscape and geopolitics in profound ways.

The world is much more connected today than in 2011. The greater connectedness has made Shaping of megaprojects more challenging. The amount of information and disinformation available today dwarfs 2011. In 2011, the remarkable term alternative facts had yet to be coined, although the underlying concept was surely known. And in 2011, artificial intelligence (AI) was talked about but in much the same way we talk about space travel today.

There are more megaprojects today than ever before. Projects have increased in size and complexity for a number of reasons: easily accessed resources close to markets have largely been depleted; international oil companies must venture into deep water and other difficult environments because national resource holders control more easily developed oil and gas; chemical companies seeking lower cost feedstocks need to exploit economies of scale to compete globally, and often must go to the source of the feedstocks to make the project viable. The need for extensive infrastructure development means that many projects will have to be very large to spread the infrastructure costs over a wide enough base of beneficial production to be economic.

The efforts to control climate change, which are just beginning, have already given rise to a great many megaprojects and will give rise to thousands more if the efforts are successful. Many of the megaprojects aimed at climate change mitigation have already encountered significant problems, especially with regard to economic viability and stakeholder alignment. If, as a projects community, we do not learn quickly how to do these projects well, efforts to slow planetary warming have little chance of success.

As the projects have increased in size and complexity, they have become much more difficult to manage. Cost overruns, serious slips in completion schedules, and operability problems have all become more common. Many of these very large projects end up being disappointing to their sponsors; a fair number turn out to be massive destroyers of shareholder wealth; and a few are horrendous with respect to anything and everything involved: the investing companies, the local population, and the environment. When megaproject disasters become public knowledge, which is rarely the case, they damage reputations and even jeopardize continued existence.3

IPA's research program on megaprojects over the past 20 years shows clearly that most of the poor results of these projects constitute self-inflicted wounds. The sponsors are creating the circumstances that lead inexorably to failure. And that is profoundly good news! What we do, we can fix.

Who Should Read This Book?

Anyone with responsibility for large, complex, or difficult capital projects will find things of interest in the pages that follow. My particular goal is to help those who sponsor, direct, or work on large projects guide the projects to safe and successful outcomes. Although my focus is on industrial megaprojects, very large projects sponsored by the petroleum, chemicals, minerals, power, and related industries, those working on large public infrastructure projects should find the discussion relevant to their work.

Anyone interested in complex projects, even if they fall far short of megaproject status, will find the story of these projects informative to their situation. Most of the basic principles of doing megaprojects well are the basic principles of doing all projects well. Small complex projects often behave more like megaprojects than their small project cousins. If the reader is interested in projects generally, megaprojects will always be fascinating.

I very much hope that members of boards of directors of companies that sponsor megaprojects will read this book. To be blunt, when it comes to the governance of large projects, most boards strike me as brain dead. They are not asking the right questions and they are not asking questions early enough in the process to deter bad decisions.

Those who finance major projects should find a great deal of interest (forgive the pun) in the book. In many respects, this book is all about large project risk, which is a key concern for banks and others involved in project finance. It is my observation that bank financing often increases cost while doing nothing whatever about project risk.

Those who are concerned about the management of the modern publicly owned industrial corporation and teach others about how it should be done will also find this book interesting, and perhaps, very disturbing. The failure of these projects is symptomatic of the core problems of the modern firm: too much out-sourcing of key competencies, poorly informed decision-making, a woeful lack of accountability for results, and a pathological focus on the short-term at the expense of the long-term health of the corporation and its shareholders.

What Is an Industrial Megaproject?

The projects that are the subject of our research are a subset of all projects and even a subset of large projects. We focus on industrial megaprojects. By industrial, we mean projects that make a product for sale, for example, oil, natural gas, iron ore, nickel, gold ingot, diamonds, high-volume chemicals, and so on. All of the projects under scrutiny were intended to make an economic profit, at least eventually, for some if not always all of the sponsors.4,5 By confining ourselves to industrial projects, we have excluded several classes of important projects: military developments, purely public works and transportation projects, monuments, works of art, and so on. By excluding these sorts of projects we have excluded some megaprojects from our analysis. We have a couple of reasons for doing so:

Confining ourselves to projects that are intended to make money simplifies the task of assessing outcomes, while not necessarily simplifying the range and complexity of objectives in the projects. Although it is true for almost all of our projects that

someone

wanted and expected to make money on the result, it does not follow that

all

of the sponsors expected to make an economic profit. Some were motivated by jobs creation, political ambition, general economic development, and other “public” goals. These “mixed motive” projects, as we call them, are an interesting class and pose challenges for “for-profit” sponsors.

Having some economic profit motive disciplines and constrains the objectives of the projects in important ways. Some public works projects have objectives that are hard to fathom by mere mortals. Some military acquisition programs appear to continue almost solely on the strength of political patronage long after the military rationale has become obsolete or discredited.

6

And some “prestige projects,” such as the

Concorde

supersonic transport, have objectives that must forever be in the eye of the beholder. Who is to say whether prestige has actually been enhanced and was it by an amount sufficient to justify the opportunity cost of the project? Industrial projects tend to have at least some nicely tangible objectives.

What makes an industrial project an industrial megaproject? Megaprojects, as the name implies, are very large. We start considering a project in the megaproject class at about $1 billion in today's terms. This is slightly more relaxed on the low side than the definition used in the first edition of Industrial Megaprojects. I decided to make the change because using the $1 billion threshold, there is no relationship between size and success or failure7 (to be defined in the next chapter). If we include smaller projects, success becomes negatively related to size.

Why Study These Projects?

There are four compelling reasons to study and understand megaprojects:

There are many more of them than in times past and this will continue for decades to come.

These projects are important. They are important to the societies in which they are being done; they are important to the health of the global economy; they are important to the sponsors and others putting up huge amounts of money.

These projects are very problematic. They are failing at an alarming and unsustainable rate.

There is not much published that speaks directly and quantitatively to the types of projects considered here.

I will discuss each of these reasons to worry about megaprojects in turn.

Increasing Numbers

Industrial megaprojects have become much more common. For much of the 1980s and virtually all of the 1990s there were few very large projects, even in the petroleum industry. The Norwegian and U.K. North Sea had been home to a number of megaprojects in the 1970s. These projects had a very difficult go, and without the rapid rise in crude oil prices in the wake of the overthrow of the Shah of Iran, almost none of the megaprojects in the North Sea would have been profitable ventures.8 Most of the megaprojects that had been in planning stages in the late 1970s died abruptly when commodity prices fell in the early 1980s.

However, a number of factors have converged to make megaprojects much more common in the first decades of the 21st century, and these factors give every indication of being enduring drivers of very large projects. The first factor driving the current wave of megaprojects has been the rapid rise in the demand for almost all major commodities; iron ore, coal, copper, and petroleum have all experienced very rapid increases in demand (and therefore, price) since 2003. Previously, most prior commodity price fluctuations had not been synchronized; prices might rise for one or two metals, oil and gold prices might rise for political reasons, but not all at the same time. The underlying common driver this time was the rapid industrialization of China and India in the context of reasonable overall global growth. None of the major commodities are actually facing imminent global depletion; however, most are facing upward sloping long-run marginal costs.

The different commodities have had somewhat different drivers for large projects:

Opening up a new major mineral ore body has long been expensive. Most major new mines today are in places that require major infrastructure development to be practicable. When a good deal of infrastructure is needed, the production volume must be very large to spread those infrastructure costs across a broad enough base for the venture to be profitable. This makes large size the only avenue to development, not an option. Today, a good many megaprojects in mining are driven by the “energy transition metals,” that is, those required to sustain efforts to mitigate climate change: copper, nickel, cobalt, lithium, and rare earth metals.

Crude oil is a special case, at least partially. A large portion of oil that remains relatively inexpensive to produce is held by state companies.

9

In order to stay in the oil business, international companies have been pushed quickly into places where oil is difficult and costly to develop, usually deep water. International companies also have gained access when reservoirs are difficult to produce, for example, offshore heavy oil production in Brazil, very heavy oil onshore in Venezuela, the very sour oil and gas reservoirs in the Caspian area, or the very harsh climate off the eastern Russian coast, or in inaccessible areas such as central Africa. As a consequence, the marginal capital costs of production have increased very rapidly for these companies. This translates into a dramatic increase in the number of international oil company megaprojects.

Rapid changes in the global economy have driven basic chemical companies to shift more of their manufacturing to fast-growing Asian economies. They have also sought to gain feedstock cost advantage by moving manufacturing to countries offering feedstock at below world open market average prices to attract production facilities, mostly in the Middle East.

10

A wide variety of megaprojects are being spawned by climate change action: carbon capture and sequestration, nuclear reactor projects, including small modular reactors, wind and solar renewable power, and various forms of hydrogen and hydrogen-to-carrier projects.

Megaprojects Are Important

Without the industrial megaprojects in the extractive and manufacturing sectors, global competition for resources, which is already very intense, would become unmanageable. While one can reasonably question whether extractive projects have been a net boon for less developed economies that hold large supplies, one cannot doubt that the overall megaproject effect on global economic growth has been substantial. Megaprojects are responsible directly and indirectly for millions of jobs around the world, and without the many megaprojects we have seen over the past decade, global prices for virtually all major commodities would be much higher with all the attendant economic dislocation.

For the sponsors of megaprojects, success or failure of the project can mean the success or failure of the company. For all except the largest oil companies, a serious failure of a megaproject puts the company's future in jeopardy. Megaprojects are increasingly seen as essential to being competitive, but in many cases, the skills needed to effectively develop and control these projects have not developed in tandem with the need.

It is also important to remember that the success or failure of these projects is often critical to the societies in which they are developed. Megaprojects place a good deal of stress on local communities. When they fail, and especially when they fail completely, the local communities suffer irreparable damage.

Megaprojects Fail Too Often

Megaproject results are frequently seriously short of the expectations of the sponsor-investors. Their cost overruns are often so significant that the whole project becomes NPV negative.11 Their schedules often slip and early-year operability, which has a disproportionate effect on profitability, is frequently very poor. Occasionally, the projects produce environmental disasters as well. As we will show, these results are not inherent in the nature of the activities. They are, instead, caused by human decisions, ignorance, and uncontrolled but controllable human failings. These projects can be fixed.

The Literature Is Sparse

This book is needed because, despite the many thousands of pages written on the management of projects, very little of the literature addresses the peculiar nature of very large and complex projects as a class. There are some notable exceptions. Morris and Hough explored a set of eight very large public and private projects in 1987.12 Like me, they concluded that the success rate is quite disappointing. I build on their path-breaking work. Miller and Lessard13 and their colleagues explore what they call “large engineering projects,” focusing on the development of new institutional arrangements. Their discussion of the process by which turbulent project environments might be settled is a key starting point for our own discussion of the Shaping process in Chapter 5. We focus much less on the creation of new contractual forms, such as build-own-transfer (BOT) simply because we have seen very few of these “new institutional arrangements” actually function as advertised. Our data, which are considerably deeper than that found in Miller and Lessard, flatly contradict the effectiveness of certain arrangements, such as incentivized contracts, which they tout as successful.

Flyvbjerg, Bruzelius, and Rothengatter make the most recent major contribution to the megaprojects literature, focusing primarily on very large infrastructure projects executed by the public sector around the world.14 Although I share some of the same conclusions about these projects, public infrastructure projects are, in many respects, quite different than the projects explored in this research. Public infrastructure projects share many of the pathologies common in other publicly funded projects, such as military acquisition. They are frequently beset