Competency-Based Organization For Project Management

Competency-Based Organization For Project Management Shekhar S. Patil, Ph.D. (USA) Abstract. Though the concept of organizational competence and competencies is well-established in the business and management literature, it is not clearly established or understood in the project management community. Competency considerations are critical for owners of capital projects who struggle to decide the extent to which they can rely on contractors and vendors during the development, engineering, procurement, construction, and startup of capital assets. Owners internal engineering organizations bear the primary responsibility for making these decisions and are continuously under pressure to demonstrate that they are effectively utilizing in-house personnel while using contractors and vendors where practical. As a consequence, headcount of in-house engineering and project personnel becomes an area of cost cutting activities in some owner companies. Some owners form alliances and soon find out that even the alliance relationships need to be constantly managed, and that there is no real alternative to being a prudent buyer of project competencies regardless of the type of contractual relationship. Unless project organizations are defined and measured based on a range of competencies needed for project success, the project management community will continue to struggle with properly addressing organizational aspects that affect project performance. Based on the work originally done for the U.S. Construction Industry Institute, in this paper the author seeks to provide the business leaders, project executives, managers, and engineers with an approach to define and measure capital project competencies. This subject was the focus of the author s dissertation at Texas A&M University in 2000 and remains a key aspect of his subsequent consulting practice. Keywords: Capital project, project competency, core competency, outsourcing, project organization, engineering headcount Introduction Regardless of their size, construction projects involve more than just the owner s project organization. Contractors and vendors play important roles in project development, execution, commissioning, and startup of constructed assets. As the stewards of the shareholders money or interests invested in projects, owners have long been interested in determining the most effective combination of owner, contractor(s), and vendor(s) personnel that would maximize the value created by projects. Owners project managers continue to wrestle with proper definition of the owner s and contractors roles in the supply chain of construction projects, even though management strategists and practitioners have long embraced the principle of core competencies of the stakeholders in a manufacturing supply-chain [Prahlad and Hamel, 1990]. This paper addresses the economic principles and incentives that must be considered while defining the roles of construction project stakeholders in the project development and execution process, and presents an approach to define those roles at a strategic level. The U.S. Construction Industry Institute s (CII) Core Competency Toolkit provides a decision process for efficiently defining the roles of owners and contractors in project development and execution based on the concept of project competencies [Patil and Anderson, 2005]. The term contractor is used in this decision process to imply any one of engineering, procurement, or construction service providers, vendors, technical specialists or consultants. The three most important concepts presented in the toolkit are project competency, core project competency, and owner leadership. A project competency comprises a documented work process and the functions and associated capabilities needed to execute the work process. Every project requires the project team to execute a number of different project competencies in a seamless manner. A core project competency is the work process that provides competitive advantage to the owner and is, or may become, critical to project success because of the inability of the market to maintain or execute the work process in an effective and reliable way. Competitive advantage can be measured in 1

terms of capital cost, schedule, operational performance, or life cycle costs of capital projects. The concept of owner leadership in the Core Competency Toolkit implies that the owner develops and maintains the work process for the competency internally, using in-house personnel, but may outsource the execution of the work process. When leading a competency, the owner sets guidelines, directs, reviews, and approves all work performed by contract or contractor personnel using the owner s work process. Competencies that the owner should perform or lead are considered core to the owner whereas competencies that the contractors own and perform are considered non-core to the owner. Figure 1 illustrates the concept of core and non-core competencies in conjunction with the phases in the life cycle of a construction project. Who Makes Outsourcing Decisions? Though a project owner has a fundamental interest in maximizing the value created by the project, the project owner is not necessarily a cohesive group of people. The owner company typically comprises the business personnel that sponsor and are accountable for the profitability of projects, the engineering or project management personnel, and the operations and maintenance personnel that take over the responsibility to own and operate the constructed asset. The business influences and sometimes dictates the owner and contractor roles in project development and execution, because the business ultimately bears the cost of the in-house engineering and project personnel. In other words, the business drives the outsourcing decisions that affect the headcount of the owner s in-house engineering and project personnel. As a consequence, the engineering leadership is required to constantly justify the headcount of in-house engineering and project management personnel and the associated costs. Therefore, it is necessary to examine the underlying principles and the incentives of owners and contractors in providing various competencies to projects, and to understand the competencies for which in-house owner personnel positively influence the value created. It is universally acknowledged in the construction industry that the ability of the owner to influence project outcomes diminishes as projects advance through the initial project development phases such as business planning and front-end loading (engineering and project planning before full funds authorization), into the execution phases such as detailed engineering, procurement, construction, commissioning, and startup [CII, 1997]. Changes to project objectives or scope after project development tend to be time consuming and costly. Therefore, owners must do everything in their control to maximize the chances of project success before commencing execution, through ownership and control over project competencies that provide the most influence on project outcomes. 2

Role of Project Competencies in the Supply Chain of Construction Projects Startup Development of Business Case or Project Justification Alternative Selection And Scope Development Preliminary Engineering and Execution Planning Detailed Engineering and Construction Operation Project Competencies: 1 2 3 4 5 6 7 8 9..... N Each competency comprises a documented, formal work process with specific deliverables, and the associated functions, skills, and capabilities To perform or lead a competency the project owner must have an in-house work process Owner Performs all work (OP) Owner s Core Competencies Owner Performs the work, Contractors/Vendors provide Input (OPCI) Owner Leads the work, Contractors/Vendors Perform most of the work (OLCP) Non-core Competencies CPOI CP OP (Contractor or Vendor involvement as necessary) Figure 1 Project Development The most important activities during project development include alignment of the stakeholders on the business and project objectives, defining the project scope and execution plan, and estimating the project s cost. The quality of deliverables produced during project development drive project cost and schedule performance [Hollmann and Merrow, 2001]. When contractors are involved in project development, they influence the project scope and the cost estimate without necessarily understanding the owner s business drivers for the project. Contractor personnel do not have the experience or the economic incentives to develop that understanding of the projects business drivers. Proper definition of owner and contractor roles during project development is critical, because owners and contractors are faced with conflicting interests and different abilities to manage risk. Owners want to minimize the capital cost while maximizing the : Business Review and/or Go/No-go Decision functionality. Owners have the ability to balance the equity risk of their investment with the operating profits or customer benefits provided by the constructed asset. Contractors, on the other hand, are not in the business of owning assets or making money by selling products produced by the constructed assets. The contractors provide services to meet the owner s project objectives, generally with little ability to manage the equity risk. The efficiency of their work processes is the contractors primary and often the only mechanism to manage their equity risk. As a consequence, contractors tend to be conservative in their estimating practices for preparing the conceptual and budgetary cost estimates that owners need before authorizing the project to proceed with execution. Competitive bidding addresses this problem only to a limited extent, as the basic economic drivers of contractors conservatism apply to all bidders. Corporate owners, on the other hand, want to ensure that these early cost estimates are competitive. The problem is different for public works projects because the 3

absence of a profit motive generally results in weak development as well as execution discipline, so the owners early estimates are often significantly less than what these projects eventually cost [Flyvbjerg, et al. 2002]. Therefore, owner leadership is critical for developing a realistic and competitive project scope, execution plan, and cost estimate during project development. The best performing owners maintain the in-house resources necessary to develop and shape projects on the front-end and to bind the owner functions to choose the right project and prepare for efficient execution [The Business Roundtable, 1997]. Therefore, owners should generally consider most of the project development competencies shown in Figure 2 as core to their business [Merrow, 2005]. The Use of Alliances or Contract Engineers To effectively manage owner engineering and project organizations through occasional economic downturns, owners often rely on the use of alliance contractors or contract engineers that work under standing contracts for technical services. The underlying strategy is to limit the headcount of in-house personnel to the minimum required staffing levels during periods of low capital spending and when the spending increases, supplementing the inhouse staff with alliance contractor personnel or personnel hired on contract. The primary objective of using alliances is generally to minimize the significant transaction costs associated with forming contractual relationships every time they are needed. What distinguishes the successful engagement of alliances and contract engineers from the unsuccessful engagements is owner leadership of the key project development competencies or work processes. It is not the alliance, but the substance of the work process that drives the results [The Business Roundtable, 1997]. Project Competencies in the Supply Chain of Construction Projects Startup Development of Business Case or Project Justification Alternative Selection And Scope Development Preliminary Engineering and Execution Planning Detailed Engineering and Construction Operation PROJECT DEVELOPMENT COMPETENCIES 1. Converting research to project/scale-up 2. Formulation of business case/project basis 3. Conceptual and preliminary engineering 4. Conceptual cost estimating 5. Environmental permitting 6. Project management 7. Project controls planning 8. Constructability and construction management 9. Contract/legal administration PROJECT EXECUTION COMPETENCIES 10. Detailed engineering 11. Detailed cost estimating 12. Procurement 13. Project controls during execution 14. Construction safety 15. Construction supervision 16. Construction OTHER PROJECT COMPETENCIES: 17. Startup 18. Benchmarking and Continuous Improvement Figure 2 : Business Review and/or Go/No-go Decision 4

Project Execution Project development is followed by, or in some cases overlaps with, the execution phase that involves the procurement of material and services, preparation of issue-for-construction or detailed engineering drawings, construction, and commissioning. The execution phase for a well-defined project simply requires implementation of the plans set forth during development, although proper discipline and control during execution are paramount. Project management binds project development, execution, and commissioning in a seamless stream of activities and is a focal point of the owner s activities through all project phases [Arber, 1992]. The ensure the seamless integration of all project activities, the successful project managers take into account the efficiency of the market to competitively provide specific project execution competencies when they are needed over the life of the project. Among two basic execution competencies detailed engineering and construction the former is influenced by vastly improved technologies for long-distance communication and information sharing. Most large engineering contractors have, or are acquiring the ability to perform detailed engineering from distant corners of the world when needed. As a result, detailed engineering services are rapidly becoming a global commodity for which a fairly efficient market dictates the price. The efficiency of the market to provide the construction competency is often driven by the size of regional and local markets. However, large international contractors have the ability to act as general contractors anywhere in the world. On most projects the general contractors rely on subcontractors in the local market to perform the work. The general contractors ability to manage local subcontractors is what the owners lack, and often engage the general contractor for that reason. Owners can usually rely on the market for all the execution phase competencies shown in Figure 2 because knowledge of the local market is important for executing these competencies, and there is usually a competitive market that can provide these competencies. As illustrated in Figure 3, although the costs expended during the execution phase are many times more than the costs associated during project development, the project development phase provides the most influence over project costs to the owner. 5

Competencies in the Early Project Phases Require Less Resources But Provide the Most Influence on Costs Development of Business Case or Project Justification Alternative Selection And Scope Development Preliminary Engineering and Execution Planning Detailed Engineering and Construction Operation Startup High Owner s ability to influence project costs Low Cumulative project costs excluding cost of uninstalled material Up-front investment buys a lot of influence! Project Commissioning and Startup After construction is complete the constructed asset is commissioned and started up for operation. This phase in the project life cycle marks the transition from construction to operation, so the involvement of owner operators in the planning for as well as during the commissioning and startup competency is critical. The commissioning and startup phase has the potential to delay the transition from construction to the revenue generation that begins after startup. For that reason, industrial owners typically maintain and executive the commissioning and startup competency inhouse. Project Closure After a project is started up and handed over to operations, closing all accounts and feeding the cost and schedule data into an owner database is very important. Owners that ignore or miss this step reinvent the wheel and pay for it every time they perform a similar project again and do not have the historical data to perform good conceptual cost estimating or estimate validation before final project Figure 3 : Business Review and/or Go/No-go Decision authorization [Hollmann, 1995]. Therefore, it is very important for owners to recognize that project completion does not end at commissioning or startup of the constructed asset. Systems and personnel to properly measure and document project costs and even the operations and maintenance costs are critical to managing assets based on life cycle cost considerations. Summary Proper definition of the roles of all stakeholders who influence the outcome of a project is the foundation of an integrated and aligned project team, without which projects often fail. Owners must take the lead in defining those roles early in the project life cycle, instead of being reactive to the business and economic conditions. This paper provided an overview of the competencies projects need, and an approach for the owner s business leaders, project executives, managers, and engineers to define owner and contractor roles efficiently by avoiding unnecessary duplication of resources. 6

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