A recent article in The Wall Street Journal heralded the following: “Power Plants Bloom Even as Electricity Prices Wilt.” Understandably, the WSJ editors are excited about the current spate of combined cycle construction projects. I’m also pleased about the growth in our sector (Figure 1). But I’m less sanguine about our ability to execute all those new projects, because approximately 70% of current projects seem destined to be at least three months behind schedule!
My consulting firm—The Power Gen & Construction Practice LLC—was recently commissioned by a client to determine its exposure to delays during power plant construction. Our study focused on all power projects in the U.S., excluding those based on renewable or nuclear energy. To determine our client’s exposure, we studied:
- Construction-industry reports from such trade groups as Associated General Contractors.
- Power-industry periodicals, such as POWER magazine and Engineering News-Record.
- Studies by major consulting/accounting firms.
- Transcripts of industry analysts’ calls with the CEOs of engineering, procurement, and construction (EPC) contractors.
For example, the following quote comes from an excerpt of one analyst’s call in 2017 with the CEO of an EPC contractor. “When the projects were originally estimated, we estimated them as pretty much on par with productivity we had seen elsewhere in the company. Clearly, we were wrong. So, I think that these power projects kind of, in general, have been challenged through the cycle, just across the board—like for all of the EPC companies—quite differently from our other projects elsewhere in the country. Until we truly understand the productivity issues from specifically union construction, we will not be bidding any more of those jobs.”
In addition to these public sources, we held private meetings with managers of insurance carriers, EPC contractors, and project owners, who gave us an inside look at their losses and delays, on the condition of confidentiality and non-attribution.
Productivity Shortfalls and Unrealistic Expectations
All of our sources agreed that the primary cause of combined cycle project delays is a combination of shortfalls in labor productivity and quality. This shortfall in labor productivity and quality was found both in craft labor at the project site, and in workers throughout the supply chain. When craft labor was responsible for the delay, the underlying issue was often insufficient experience or insufficient training. When supply-chain workers were responsible, the underlying issue was generally a failure to meet delivery commitments or design specifications.
We’re not suggesting that the shortfall in labor productivity was solely to blame, because our study also revealed cases in which management was responsible for the delay. When management was responsible, an underlying issue was frequently the failure to perform proper due diligence, which resulted in unrealistic time schedules and expectations.
For example, some project owners and EPC executives created their schedules by extrapolating information from previous or similar projects. Their failure to account for changing labor conditions in each project locale—or for the fact that earlier projects may have ultimately exceeded schedule and budget estimates during their execution phases—led them to establish unrealistic expectations.
In short, we found that project owners, as well as EPC executives, almost universally failed to perform what the business schools call “detailed Class A estimates to assess reasonableness of both budget and schedule.”
Project Management Goes Beyond Liquidated Damages
Another underlying issue when the project owners and EPC executives were responsible for the delay, appears to be their over reliance on liquidated damages (LDs) to manage the project. LDs are generally financial payments specified in a contract that must be paid in the event of a breach, such as not meeting schedule requirements. These days, LDs seem to have become a contractual “sword of Damocles,” in lieu of prudent project-management.
Despite this over reliance on LDs, our recommendation is not to completely eliminate them as a contractual tool. On the contrary, we encourage owners to continue using them, but with incentives to supplement more traditional methods of project management. The overarching lessons developers/project owners can learn from our study are the following:
- Remain involved, but don’t interfere, with contractors.
- Closely monitor onsite activities to uncover subtle signs of trouble early, before they grow into critical-path delays.
- Maintain open communications instead of relying solely on the contractual hammer of LDs to drive the project.
Our findings also suggest that owners should consider contract types other than fixed-price, lump-sum deals—such as the guaranteed-maximum type. We caution, however, that a guaranteed-maximum contract requires a highly seasoned project team, on both sides, to negotiate and administer.
The most successful projects in our study were managed the old-school way—by an experienced ownership team that assembled an onsite group of professionals to eyeball construction and to rub shoulders with a similarly experienced group of contractors. This need for an experienced team isn’t a new lesson. It’s a textbook example of the old management adage: “You get what you inspect, not what you expect.”
Developing Needed Industry Resources
The findings from our study are troubling for more than just the U.S. combined cycle industry. We believe they also provide a cautionary implication regarding U.S. national security.
What’s the connection? Let’s start with the understanding that national security requires reliable infrastructure. Then consider that in this Information Age, no single infrastructure is more important than the electric grid. Cybersecurity is an issue our industry is already working to improve, and rightfully so, but shouldn’t we also be working to improve the construction of plants feeding the grid? To do so, we must develop the following resources:
- Experienced project owners who understand the need for due diligence by their own team of experienced professionals.
- EPC executives who understand the need for their own due diligence, too, so that they don’t steer their companies into projects that have problems already cooked into them.
- A deep pool of trained and experienced craft labor—welders, steamfitters, millwrights, and so on—that can construct and commission large-scale power plants with efficiency, quality, and productivity.
Our study reveals that the pool of craft labor has diminished significantly. What caused this condition in our workforce? There are a number of causes, but our study suggests that the government’s lending policy, which pushes high schoolers toward college instead of toward a vocational or trade school, is at least partly to blame.
Not very long ago, pursuing a hard-working, blue-collar vocation was considered to be an honorable goal for our high schoolers. But these days, as Mike Rowe—star of the Discovery Channel’s “Dirty Jobs” program—has noted in his blog, “pursuing a vocation is considered a consolation prize.” That’s a problem we believe the combined cycle industry must address. The HRSG User’s Group will begin addressing it in our upcoming workshop, “The Future of HRSG O & M, Design, Commissioning, and New Projects,” on February 12, 2018, at the Hilton Americas-Houston.
—Robert Sansone is co-chairman of the HRSG User’s Group.