February 5th, 2014
Project complexity is growing. It’s a truth we’ve seen across a multitude of industries as projects become more ambitious, take on new technological challenges, and command stratospheric budgets (where a $10 billion capital expense is no longer surprising and can be dwarfed multiple times over by the world’s very largest endeavors).
A recent Wall Street Journal article entitled, “Big oil companies struggle to justify soaring project costs,” corroborates this growing complexity and cites the difficulty in containing costs with megaprojects that span years and face ongoing market changes. Factors that are driving complexity and cost are diverse, but can include items like:
- Exchange rate fluctuations as projects utilize multiple currencies which can also be distinct from reporting and home currencies.
- Underlying economic conditions affecting the viability of projects – from commodity price volatility to changing regulatory requirements
- Rising labor costs as competition rises for a limited skillset and increasing productivity becomes essential
- The need for collaboration on projects amongst competitors, as multiple players join forces and pool resources to embark on these gargantuan projects.
The result is seen in megaproject costs soaring 50% to even 300% of original budget. The article quotes Gary Fischer who leads Chevron’s 120-person cost controls and contract management group. These projects “are very fragile and totally unforgiving” indicating why the department has tripled in size in its efforts to complete megaprojects on time and on budget.
Why undertake “Elephant Projects” of this size and scope then, you may ask? It’s a key part of the growth strategy of many of the oil majors looking to boost production to replace aging fields. It’s a calculated risk, however, given the long lead times between capital expenses and when the revenue begins to flow.
Major oil companies, once seemingly impervious to project cost overruns which had paled in comparison to revenues the projects produce, are now directly impacted by the sheer cost of megaprojects and their negative impact on near-term profits.
To combat the megaproject complexity, organizations are implementing procedures and systems that offset the risks of overruns and combat the factors noted above. The intent is to add visibility into project performance and allow for greater agility to address issues that lead to overruns before they grow into billions in added expenses.