Insights
Unmasking Hidden Risk in Utility Projects
Utility projects constitute a significant investment of time and money. What if you could improve productivity by 1%-5% on a large-scale utility project? Gaining a better understanding of the unseen risk often overlooked in these projects will result in increased productivity and mitigate the liabilities and potential financial cost overruns.
WHY UTILITY PROJECTS ARE AT RISK
RESISTANCE TO CHANGE
For decades, utility projects have depended on their own capacities to execute and manage capital projects. This traditional strategy works, but new approaches are required as infrastructure projects become more complex and demanding. While the confidence to “do it ourselves” is admirable, the sheer volume of projects, as well as the necessity for real-time solutions, will undoubtedly overwhelm even those utilities with capital projects expertise.
Once a utility project has hit a significant setback, it can be especially challenging to reset the project productivity. Why? Because, unlike typical operations, utility project management entails a level of unpredictability that stretches resources, and even the best-planned projects will be vulnerable to alterations and revisions.
When confronted with the repercussions of this unpredictability, the desire for stability can often outweigh the need for change in risk management. It’s time to reconsider any statement that begins with “because we’ve always done it that way.”
As a rapidly changing industry, utility projects are highly prone to risk, which must be carefully studied and thoroughly mitigated by risk management experts.
PROJECT RISK IN RELATION TO HUMAN RESOURCES
DEFINE A COMMON LANGUAGE
When it comes to utility projects, staffing can be a common problem.
“IT’S IMPORTANT TO HAVE A MULTI-DISCIPLINARY APPROACH WITH, FOR EXAMPLE, COMMERCIAL PEOPLE WORKING ALONGSIDE TECHNICALLY SKILLED EXPERTS. BUT THIS ALSO MEANS YOU NEED TO DEFINE A COMMON LANGUAGE (ACROSS PROJECT TEAMS).”
-Torsten Flosbach, E.On project leader for a major new CCGT power plant at MalÏenice
Besides often working with a small core project team, project managers usually negotiate with other groups to borrow staff, which can easily lead to misaligned goals. Therefore, utility projects face the combined risk of understaffed or unqualified teams, as well as the large-scale diversity (from on-site supervisors to commercial management, for example) across professions that is often present in the project team. To overcome this double threat, the project team must establish a ‘common language’ or mutual objective with the correct monitoring and controls in place to maintain clear and consistent communication. Concentrating your expertise also means that you can convey a consistent message to the supplier/vendor market.
Having a common language to communicate the risks properly is one of the main tasks in project risk management.
Another critical component to averting risk with human resources is building a culture of transparency, specifically in the early stages of a project.
“TOOLS AND STANDARDS HAVE THEIR PLACE, BUT, AT THE END OF THE DAY, IT IS ABOUT PEOPLE AND RELATIONSHIPS. IF THE PROJECT MANAGEMENT TEAMS FROM BOTH SIDES ARE NOT MEETING REGULARLY, COOPERATING, AND SPEAKING VERY OPENLY, THEN YOU WILL NOT HAVE SUCCESS IN THE OVERALL PROJECT. TRANSPARENCY MEANS HAVING ONGOING TALKS (MEETINGS) DURING THE PROJECT.”
-Rainer Kiechl, CFO Hitachi Power
Establishing this transparency within a project team starts at the beginning. By utilizing the ‘common language’ and involving the whole team on day one, you gain buy-in for any upcoming challenges as you move forward. Without transparency, issues escalate out of proportion and precipitate misunderstandings and avoidable tension.
Finally, some projects struggle to make it across the finish line because the organization lacks a robust methodology and training, specifically in project controls, commissioning, and closeout. When closing out a project, Abbott’s experts utilize a level of diligence and energy that carries the entire project team along with us. Our clients trust us to ensure risks are mitigated, accounts are final, data is secure, and goals are achieved.
PROJECT RISK IN RELATION TO COST
PLAN FOR THE UNEXPECTED
Just as the successful completion of a project is dependent on performance, so is the beginning of a project dependent on clearly defined objectives. One of the most critical components to clearly defined goals is the project’s financial controls. When developing a project’s financial structure, it is crucial to allow contingencies that can mitigate the impact of unexpected obstacles.
PROJECT RISK IN RELATION TO DELIVERY
PMO SETUP TO RETAIN VALUE
As a large capital investment, utility projects pose significant risks of financial mismanagement. If incorrect estimates and systems are in place, risks might manifest as underperformance or impairments, which can severely impact a company’s profitability, indefinitely. PwC’s Anthony Morgan described the early phases of a project as ‘value creation’. Once the ‘point of no return’ has been reached, the implementation and delivery phases should be ‘value retaining,’ however if things go wrong, the delivery phase could be a constant ‘value destroyer’. So, what does it take to get it right in the planning stages?
“CORRECTLY SETTING UP, MANAGING AND CONTROLLING THE SUPPLY CHAIN IS ONE OF THE KEY SUCCESS FACTORS FOR PROJECTS.”
First, one must analyze the project’s needs and determine the most effective way to deliver the project, whether that means modularization or altering the commissioning method to maintain the intended design. Second, it is critical to determine the correct resource in the supply chain to effectively deliver your project in relation to schedule and cost. Reinforcing these key steps with a 3rd party project controls consultant not only continuously verifies that your supply chain is aligned with your project’s goals but also plans ahead for likely changes in project delivery.
In addition to supply chain strategy, the type of procurement approach is also an essential factor in whether project delivery becomes ‘value retaining’ or ‘value destroying’. The core project management team must evaluate the client’s primary objectives concerning overall cost and schedule certainty, risk, design quality, workmanship, programming and make recommendations for the procurement management approach that will best achieve these goals. This means selecting the right team based on scope, complexity, and the need for specialized knowledge across project teams, including contract negotiations, tender evaluations, and vendor vetting.
PROJECT RISK IN RELATION TO DISPUTES
OBJECTIVE DECISION MAKING
When it comes to disputes arising during utility projects, the source often lies in perspective rather than circumstance.
“HOWEVER SENSIBLE, COMMERCIAL, AND EXPERIENCED THE ORGANIZATIONS, WHEN IT COMES TO DELIVERY OF THE PROJECT IT COMES DOWN TO PEOPLE. DISPUTES HAPPEN, AND THEY CAN GET CAUSED AS MUCH BY JUST A PERSONAL BATTLE AS ACTUAL LEGAL ISSUES. ONE WAY OF REDUCING THE IMPACT OF SUCH A SITUATION IS TO CHANGE THE PEOPLE INVOLVED.”
Some remedies for dispute resolution seek to provide a fresh perspective in such situations by engaging a person not directly involved in the project delivery. For example, conducting reviews by their senior executives or by an outside third party. However, senior executives may not always be objective in their approach to the settlement negotiations. A neutral third party not only provides needed objectivity but also avoids any qualms about decision-making, as long as the goals of the project are successfully achieved
CONCLUSION
Whatever the contractual approach, utility companies should not take project success for granted. If possible, project leaders should initiate risk management in the pre-contracting stages. Instead of simply identifying reporting risks, project teams must collaborate to implement specific mitigation strategies. Added value happens once live/real-time risk tracking is in place to minimize the impact of risk on project performance.
