Real Estate Projects – Cross Pollinating best practices from capital projects execution March 31, 2014 Andrew Wilson Ravindra Gurjar Jayan R 1 Copyright ©2014 E. I. du Pont de Nemours and Company. All rights reserved. The DuPont Oval Logo, DuPont™, and The miracles of science™ are registered trademarks or trademarks of DuPont or its affiliates. Executive Summary Indian real estate sector has seen visible transformation in this decade and currently occupies and prominent position in the country’s economy. The sector employs more than 10 million people and attracts 40% of the total investment made in the construction sector in the country. This sector holds considerable promise for growth with an estimated shortage of approximately 60 million housing units in the country. According to research considering factors like rising household income levels, demographics and migration of working population to the towns and cities, an additional 25 million units would be required in next three years. In addition this sector also supports a host of other ancillary units like building materials, cement, steel, timber etc. LIC Housing Finance Limited has estimated that 78% of the amount spent on the construction of the houses is added to the country’s GDP through ancillary industries. Over the last 50 years, DuPont has experimented with a variety of project execution models for its capital projects executed across the globe. These experiences have helped us in tailoring our execution methodology to adapt to scenarios prevailing across projects and sites. Since 1994, DuPont has been consistently assessed as a top quartile performer in capital projects executions by Independent agencies. While analysing the challenges faced by real estate sector some of the areas, which can make an impact are: ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ Choice of “Right” Project Execution model Structured “Front End Loading” Contracting Strategy & Contractor Work Management Integrated Project Team Minimize non-value adding Investments Management of Environmental, Health & Safety Execute with “NO CHANGES” Project Portfolio Management The sector faces considerable headwind (both macro and micro). Macro challenges include – higher interest rates, rising prices of input materials (e.g. cement, bricks, steel), increasing labour cost, availability of skilled labourers and liquidity. In addition there are regulatory challenges like multiple clearances involved for projects, floor space index caps, investment lock-in periods (for FDI), capitalisation thresholds etc., continue to plague the industry. From a project execution perspective some of the challenges faced by the developer include the perennial issues with respect to schedule, cost quality and safety of the projects. 2 Copyright ©2014 E. I. du Pont de Nemours and Company. All rights reserved. The DuPont Oval Logo, DuPont™, and The miracles of science™ are registered trademarks or trademarks of DuPont or its affiliates. Real Estate Value Chain Project Execution Challenges The real estate project life cycle can be broadly categorized into three phases - pre-construction, project execution, handover closure/ maintenance. On an average the first two phases last between ~3 – 6 years or more depending upon size, scale, location and type of development. A schematic representation of the value chain is given below: A study of project management across sectors by PMI1-FICCI2 has shown that project management practices in the real estate sector have lot of opportunities for improvement. The below chart is based on the perception of Industry experts and project practitioners. Figure 1 Real Estate Project Phases Figure 2 Project Performances – Based on PMI-FICCI study3 The final phase starts after the project is completed and included handing over the property to the owner, and the facility management team. Over the last few years, developers have found that this phase provides immense opportunity for value extraction from the projects. 1 2 3 Project Management Institute (PMI) Federation of Indian Chambers of Commerce & Industry http://www.pmi.org.in/downloads/reports/Project.Management.India.Insights.Six.Key.Sectors.pdf 3 Copyright ©2014 E. I. du Pont de Nemours and Company. All rights reserved. The DuPont Oval Logo, DuPont™, and The miracles of science™ are registered trademarks or trademarks of DuPont or its affiliates. According to study, 54%-88% of the projects in various metro cities face schedule delay of an average 7 months and subsequent cost escalation. A study of the various critical factors leading to such scenarios in this sector helps in prioritizing and developing actionable to ensure better performance of the projects. The critical concerns identified by the study include: Owner’s Role in Project Success In the recent past, DuPont has executed several projects including 24 mega-projects (>USD 0.5 bn). DuPont has an annual capital spend of approximately USD 2billion, and independent benchmarking of our projects over many years has found them to be world class across all the key project metrics (safety, schedule, cost and quality). Through our experience DuPont has understood that our methodologies, principles and core-success factors are universally applicable. In addition to our internal successes, we have been able to add value to various clients for executing megaprojects. The Owner’s role is fundamental to the success of our projects; Leadership, Pre-Planning, Owner Involvement and Project Management (refer to Figure 4). Figure 3 Project Critical Factors-Based on PMI-FICCI Study Figure 4 Owner's Role in Project Success 4 Copyright ©2014 E. I. du Pont de Nemours and Company. All rights reserved. The DuPont Oval Logo, DuPont™, and The miracles of science™ are registered trademarks or trademarks of DuPont or its affiliates. Project Excellence – Success Factors After an extensive review of our projects we have identified several success factors that determine the performance of our projects. Some of the critical success factors which are relevant for real estate construction include: ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ According to IPA4, a popular model involving PMC/EPC adds a potential 30% to project cost, unless and until proper mitigation strategies are not implemented. This happens because the risk is transferred to the third party, without proper mitigation strategies. Please refer to the Figure 5 & 6. Choice of “Right” Project Execution model Structured “Front End Loading” Contracting Strategy & Contractor Work Management Integrated Project Team Minimize non-value adding Investments Management of Environmental, Health & Safety Execute with “NO CHANGES” Project Portfolio Management Choice of “Right” Project Execution Model DuPont has experimented with a variety of execution model including - own project team (>10,000 engineers), EPC, PMC-EPC, sourcing workers etc. DuPont has understood that the choice of the execution model has to depend upon the size, complexity, location, execution schedule, technology needs, etc. Based on our experience, it is possible to define set of guidelines to identify and choose the most successful execution model for a particular project. Figure 5 Use of a PMC 4 Independent Project Analysis 5 Copyright ©2014 E. I. du Pont de Nemours and Company. All rights reserved. The DuPont Oval Logo, DuPont™, and The miracles of science™ are registered trademarks or trademarks of DuPont or its affiliates. Figure 6 Transfer of Risk to an EPC Contractor Structured “Front End Loading” The concept of Front End Loading (FEL) is based on the premise that the opportunity to influence the project is highest early on in the project, before significant amounts of money have been spent. It is therefore prudent for the owner to allocate appropriate resources early on in the project, before final authorisation, so that there is optimal decision making when the level of influence is highest (refer Figure 7). Figure 7 Opportunity to Influence Project The owner has the most opportunity to influence the project during the first FEL phases; • • • FEL1 Business Planning – what is my need/problem FEL2 Facilities planning – what do I need to build FEL3 Project Planning – how to build it The remaining phases deal with construction and commissioning. A strong gatekeeping process for each phase is the most effective means for managing risk associated with the project, be that market, technical, exchange rate or financing risks (refer to Figure 8). 6 Copyright ©2014 E. I. du Pont de Nemours and Company. All rights reserved. The DuPont Oval Logo, DuPont™, and The miracles of science™ are registered trademarks or trademarks of DuPont or its affiliates. Contracting Strategy and Contractor Work Management Early on in the Project the Owner should define the Contracting Strategy for the Project; the role and responsibilities of the contractor, the terms of engagement, and the optimum timing of contract award. DuPont practice is to award the EPC contract during FEL, before final authorization of the project. This allows input from the Contractor into the initial design, particularly from a constructability perspective. DuPont manages contractors using a six step process (refer to Figure 9). Figure 8 Ownership and Gatekeeping There are numerous risks to be considered during the Front End Loading phases, some of which are listed below; • • • • • • • • • Political and regulatory environment Financial (exchange rate, inflation) Supply side constraints Project portfolio composition Capital budgeting and structuring Land acquisition and value addition Contracting strategy and contractor management Design Constructability Figure 9 Six Step Contractor Management Process 7 Copyright ©2014 E. I. du Pont de Nemours and Company. All rights reserved. The DuPont Oval Logo, DuPont™, and The miracles of science™ are registered trademarks or trademarks of DuPont or its affiliates. Potential contractors are pre-qualified during the ‘Contractor Selection’ step. Safety can be used as a proxy for management capability; contractors who can execute the work safety can also deliver the work on schedule, on budget, and at the required level of quality. Hence an Owner may seek to identify potential contractors who have a shared value for safety. Integrated Project Team Having an integrated Project Team ensures that the business requirements of the project are met, as well as the technical requirements. Figure 10 shows an integrated project team for a typical DuPont project. Depending upon the project, the make-up of the team may be different. However, some key concepts remain; the need for a Project Sponsor, a Project Team Leader, and the identification of project roles that are core to the Owner. Minimize Non-Value Adding Investment The project will obviously create more value for the Owner if the scope is well managed so that capital is not wasted on items that are of no value to the Owner, and more importantly, to the Owner’s customers. The use of Value Improving Practices (refer to Error! Reference source not found.) helps the Owner to limit capital expenditure to meet ‘needs’, not ‘wants’. Figure 11 Value Improving Practices Figure 10 The Integrated Project Team – Representative 8 Copyright ©2014 E. I. du Pont de Nemours and Company. All rights reserved. The DuPont Oval Logo, DuPont™, and The miracles of science™ are registered trademarks or trademarks of DuPont or its affiliates. Management of Environmental, Health and Safety Environmental, Health and Safety (EHS) issues in the project relate to the construction and start-up phases, and also the operation of the asset at the conclusion of the project. The EPC Contractor will of course be focused on EHS issues related to construction. The Owner is concerned with construction EHS issues, to prevent injuries, but also as they can potentially result in schedule delays or cost blowouts. Additionally, the Owner is concerned the asset can be operated in a safe manner, without impacting the environment. Large project based organizations need to manage their project portfolios by strengthening their decision making process and criteria they use while moving through the Front End Loading phases. If a structured approach to fine tune the portfolio does not exist, projects with severe contextual problems will sail through the FEL stages till the basic design or execution stage. Hence identifying the issues at an early stage is essential to correct the issues or abandoning the opportunities since any delay will lead to burdening of the project organization and hurting the results. Addressing these issues early on, during Front End Loading, results in designs that are safer, and therefore easier, to construct. There is less likelihood during the detailed design and construct phases that the Contractor will be delayed whilst EHS issues are addressed. And finally and most importantly, the completed asset will be inherently safer to operate. Execute with “NO CHANGES” Having a strong and robust Front End Loading process enables the project to be executed with “NO CHANGES” (refer to Figure 7). If changes to the design are being made during the construction phase there will be schedule delays, cost increases and sub-optimal solutions due to the constraints imposed by the timing of the change. Project Portfolio Management 9 Copyright ©2014 E. I. du Pont de Nemours and Company. All rights reserved. The DuPont Oval Logo, DuPont™, and The miracles of science™ are registered trademarks or trademarks of DuPont or its affiliates.
