From identification & management of EPC contract risks to reduction of project costs

 

By Fleming.| 01/03/2019

 

We sat down to meet prestigious Keynote Speaker Jose Pires who serves as Founder & President of Global Excellence & Innovation, and as an advisor for startups, scaleups and Fortune 500 companies. Read his answers below on 3 questions related to the main themes of the conference:

 

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Which Excellence & Innovation principle or tool could have the greatest impact on improving EPC contract design and execution?

Great performance on EPC contract design and execution requires the intelligent application of several powerful, disciplined Excellence & Innovation perspectives, principles; and techniques. A few of the approaches may be obvious like EPC contract design and process innovation, cycle time reduction, enterprise and project-specific risk management, or contingency and escalation planning. Let’s talk about one aspect that is quite challenging, often overlooked, yet truly sets the stage for great EPC contract performance: collaborative leadership.

Most EPC contract leaders and teams do not understand or are not equipped with the right mindset and tools to effectively foster collaborative leadership. Companies typically have dedicated, cross-functional teams working on the design and execution of EPC contracts. Leaders and teams may think of themselves as being naturally collaborative. However, upon closer inspection, one finds that the team follows a pretty strict, even if thinly veiled, hierarchy predicated on titles and past EPC experiences. There is some collaboration happening within the team, absent the fear a few members may have of expressing their full views, but there is little or no collaboration beyond the invisible borders of the “core team.”

True collaborative leadership is not just being inclusive or leading by consensus. Great collaborative leaders are inclusive (of design and execution teams, other functions, suppliers, contractors, business partners and clients), value diversity and different perspectives, foster open and candid discussions, develop boundaryless teams and demand fresh ideas that may clash with their own. They also know that collaboration and the creative process that ensues can be messy and go on forever. So, for a short period of time, collaborative leaders become very directive, focusing the team on the right priorities and their relentless execution. This may come across as contradictory, but great collaborative leaders understand that true greatness lies somewhere in between these forces that pull from opposite directions.

Collaborative leadership and effective boundaryless collaboration do not evolve naturally in groups. Leaders and teams alike must be intentional about it. Thankfully, there are mindsets, mechanisms, tools and techniques that can be learned and applied to facilitate collaborative leadership, increase collaboration and team-based decision making and deliver best-in-class EPC contract design and execution.

With regard to EPC megaprojects, what are some of the key differences and approaches to better identify and manage contract risk?

Sound management practices should apply to all projects, regardless of size or complexity. Early planning, effective stakeholder communication, project controls integration and continuous improvement strongly correlate with successful outcomes in any project. Nonetheless, one of the biggest challenges of megaprojects is that errors propagate at scale. In a smaller or less complex project, you can adjust or recover from mistakes. In a megaproject, those same mistakes tend to amplify and cause controllable risk to become uncontrollable, potentially creating significant failures and losses. Early, accurate and comprehensive project definition agreed by stakeholders becomes the key driver for megaproject success.

When it comes to identifying and managing these unique megaproject contract risks, I’d suggest EPC teams focus on a couple of key failure root causes: insufficient project definition and optimism bias. They can be summarized in the proverbial “we don’t know about that yet, but we will figure it out.” Proposal and contract teams must work collaboratively with stakeholders to clarify and agree on sufficient project definitions early in the process. Best practices may include detailed project definition maturity assessments that foster a disciplined approach for dialogue and collaboration among stakeholders at every stage of project proposal and execution. Furthermore, to combat the optimism bias that leaders and teams tend to have before full definitions or detailed project execution are known, it is imperative to have qualified, independent oversight and support for the EPC core team. The goal of the oversight team members is not to simply criticize the plans or actions of the core team but to review them without conflicts of interest; and develop solutions together to mature project definitions and address early issues that can propagate and adversely affect project performance.

What can companies do to reduce EPC contract and project costs?

This may sound counterintuitive from someone who gets hired as a consultant to help companies accelerate improvement, innovation and value creation. But my experience has been that companies looking outward to gather competitor intelligence or crowdsource innovation often overlook one of the greatest sources of ideas to improve, innovate and create value: the people who already work for them.

Crowdsourcing is the practice of leveraging the “wisdom of crowds” to innovate, solve challenging problems or become more efficient. While it is mostly thought of as an activity to engage external participants and perspectives, it can also be internally targeted at company employees. Effectively tapping the “wisdom of your organization” can reveal significant opportunities for EPC contract and project cost improvements, with the added benefits of higher employee engagement and solutions more likely to be aligned for execution within the company’s culture.

In one example, we worked with a large, global EPC contractor to identify, prioritize and execute ideas to reduce contract and project costs in very tight, highly competitive market segments in Asia. By deploying inclusive and collaborative ideation sessions with the company’s employees, we gathered more than 1,000 new cost reduction ideas from about 10 different countries and dozens of business functions in just 2 weeks. With criteria and guidance from the core EPC team leaders, they ranked the ideas and chartered sub-teams to implemented specific EPC cost reduction items for more competitive client proposals and significantly lower project execution costs. Solutions ranged from elimination of extra proposal items for better alignment with basic client requirements to very specific new approaches to technology deployment and modularization for the region. And even more important, we created a system that allowed the continuous flow of new EPC cost reduction ideas from employees in any function, anywhere in the world.

Crowdsourcing within a company can have significant positive impacts not only on value creation but also on employee morale and engagement. Employees, leaders and EPC teams are also much more likely to own and persevere to fully implement the ideas they conceived. There is no doubt that crowdsourcing externally for new ideas is also very useful and can unearth significantly different perspectives and innovations. But companies should not do that while bypassing one of the greatest sources of improvements and innovations in any business: the imagination and knowledge of their own employees.

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