Collaborative Construction Beats Offshoring To Improve Alberta Major Projects: Report

Offshoring components for Alberta major projects gets airtime as a strategy to reduce costs, but owners are better off staying in-region and implementing collaborative delivery models, says a study by the Alberta Steel Manufacturers.

ASM recently commissioned the study to examine the effectiveness of different procurement methods.

The province’s record on major project delivery is dominated by oilsands megaprojects that in numerous cases have been completed at a substantially higher capital cost than originally anticipated. The challenge has persisted through market cycles, from the earliest major expansion builds in the late 1990s through to some of the most recent finished projects.

While constrained pipeline access and market uncertainty have largely taken new major oilsands projects off the table, ASM sees new opportunity in petrochemical projects. Inter Pipeline Ltd. and Pembina Pipeline Corporation both have petrochemical facilities under construction, thanks in part to government incentives. Funding agreements for two additional projects have also been announced.

Companies building petrochemical facilities in Alberta can take lessons from the oilsands experience, indicates the ASM study, completed in November 2018 by Ground State Market Solutions.

The report examines two oilsands major project execution cycles, 2004-08 and 2009-14. It concludes that in both cycles, the combination of high complexity/high risk projects with low organizational maturity resulted in significant economic loss of opportunity across the value chain.

In 2009-14, owners attempted to optimize procurement strategies by going out-of-region and offshore for project components like structural steel and pipe, with the promised discounts on procurement from Asia often approaching 40 to 50 per cent. But the strategy had little overall impact, the report said.

“The portion of the project spend profile attributable to ‘offshore-able’ components at a significant supply only discount (i.e. fabricated structural steel and pipe) amounted to approximately 10 per cent for thermal assets, and similar for petrochemical facilities…  

“Assuming structural steel and pipe account for 10 per cent of total capex, and the proposed discount is 40 per cent for each, the total economic impact to the project would be four per cent at best. Moreover, the four per cent figure is a supply-only price and does not account for the additional complexity of transportation and installation associated with offshore supply…Market intelligence/research demonstrated this to be a slightly value negative exercise at best, while incurring the risks associated with higher complexity.”

The challenge with the offshoring is that it ignores the root cause of overruns, which is inadequate project planning and project team integration, the report said.

“Even the most optimistic outcome associated with offshore steel and pipe isn’t/wasn’t going to compensate for misalignment among project team members,” Ground State principal James Wootton told the DOB.

More effective at reducing costs and improving delivery are “enhanced organizational behaviours” like Integrated Project Delivery, the report said.

“Beneficial collaboration can add significant project value, while a lack thereof can lead to extension past the system limits and consequently cascading failure, as we have seen numerous times in the Alberta major projects space.”

Collaborative project delivery has proven successful in commercial construction projects in Alberta, notes Jason Collins, president of Edmonton-based Collins Steel.

“What we’re finding in the commercial construction industry in Edmonton is that people are experimenting with different procurement methodologies which permit a more integrated approach to construction projects at an earlier stage, which mitigates project design risk from a constructability standpoint,” Collins, who is also chair of ASM, told the DOB.

“We’ve done light industrial warehouses, private office buildings, seniors residences and public schools, and we are consistently finding that getting tradespeople and designers in the same room earlier in the project cycle has decreased total project cost and duration. The lessons learned in one project can be leveraged by the construction team in future projects. Competency and values-based team member selection offers something that pricing-based procurement hasn’t traditionally offered to project owners.

“These principles, embedded into any type of construction project regardless of sector, enable a construction team to move closer to what its actual performance potential is collectively. By aligning a construction team’s focus to the project over its own corporate objectives through the principle of shared risk/reward contracts, we mitigate the risk of self-serving agendas within the team.”

Essentially, the construction team becomes a virtual company fully focused on the project objectives of the owner, Collins said.

“I cannot say this is the case in other procurement methods. Although they can be successful, it is very rare that all parties ‘win’ in pricing-based procurement.”

According to the Collaborative Construction Institute, using a model like IPD provides an 80 to 100 per cent chance of on-time, on-budget delivery, compared to 20 to 30 per cent using a “transactional” model and a less than 10 per cent chance using an “adversarial” model.

 “We’ve got a lot of smart, talented people, but it seems the industry has a difficult time making sustained progress towards new models of delivery where organizations expand and contract in fairly short time frames, interrupting continuity, and where risk taking is punished rather than encouraged,” Wootton said.

“Changing organizational behaviours is complex and challenging; far more so than cutting a purchase order to an offshore fabricator…Focusing on total value solutions, rather than competitive devaluation in the supply chain, would be very new territory. The encouraging part, however, is that we have a lot to gain.”