The U.S. midstream oil and gas construction industry has experienced tremendous growth over the past decade, forcing industry stakeholders from across the nation to work together under extreme environmental conditions, compressed project schedules, persistent labor fluctuations and ongoing cost pressures.
Despite collapsing crude oil prices and declining natural gas prices, the midstream oil and gas market is poised for continued strong growth – mainly due to the huge transportation demand for getting oil and gas from the wellheads to end users. Within the pipeline construction sector, planning, designing, and building activities remain historically high and are expected to remain robust for the near future.
Though business remains strong, many construction projects continue to be plagued by escalating cost overruns, project delays, mounting risks and declining productivity – particularly on megaprojects. Indeed, what we have is an industry imbalance shaped by volatile market cycles and the resulting decades-long push and pull among owners, engineers and contractors.
“The industry hasn’t been able to find a good equilibrium where all stakeholders get what they want,” said a large global engineering firm’s director of construction.
In FMI’s discussions and project work with industry leaders in the midstream construction space, we have found many firms operate in a highly chaotic business environment and don’t understand the basic “blocking and tackling” of construction. In this article, we explore the preparations needed to prepare a company for the next large oil and gas boom and provide straightforward tips for achieving this goal.
Finally, a case study on JV Driver (a Canadian industrial construction company) and one of its preferred suppliers, Intelliwave Technologies Inc., highlights how a creative partnership has resulted in the development of innovative tools to improve site logistics and reduce rework through effective equipment and material tracking in the oil and gas sector.
An Old Story
The U.S. construction industry isn’t readily associated with words like “cutting edge” and “innovation,” particularly when compared to high-tech industries such as aerospace or biotechnology. In fact, the U.S. construction industry has a lengthy history of productivity decline, according to numerous industry research studies.
Matt Stevens, president and management advisor at Stevens Construction Institute, Inc., calculated the U.S. construction industry’s labor productivity from 1993-2013. He stated, “Generally, the negative changes over the last three decades have outpaced the positive changes. Lack of consistent engagement by construction project stakeholders to each other has made project information flow unevenly, causing chaos. The contracts continue to be draconian, so each party acts with as much legal insulation as possible.”
Though one could debate the many reasons for ongoing productivity decline, keep in mind the true meaning of productivity. At its most basic level, productivity describes a relationship between physical inputs and outputs. The formula is disarmingly simple:
Productivity = Units of output/Units of inputs
A productivity index highlights the ways that a company can extract an increasing number of units of output per labor hour, per pound of materials or per machine. Traditionally, productivity in the oil and gas construction industry has mainly focused on direct labor. Given the continuing productivity decline, however, industry leaders now question some fundamental business practices the industry has taken for granted for decades.
“We need to move away from Einstein’s definition of insanity: doing the same thing over and over again and expecting different results,” said a supply chain manager of a large Canadian oil sands operator. “We just have to try something completely different.”
In a recent article, Bob Prieto, senior vice president at Fluor Corporation, agreed: “The persistent performance challenge drives me to question whether the theoretical foundations of project management theory – as it is widely practiced today – are sufficient to meet the challenges of large projects. … Perhaps large projects, and especially large multi-project programs, require a different theoretical foundation than the traditional theories that underpin our management practices…”
The productivity formula raises the question of whether the construction industry as a whole needs to fundamentally rethink the “units of input” by exploring new and groundbreaking business practices. For example, FMI has begun to see progressive midstream oil and gas construction firms invest heavily in building project management capacity by innovating in areas such as prefabrication, technology, knowledge management and communication, to name a few.
In coming years, oil and gas owners will likely focus on construction companies that can limit rework orders, optimize labor, equipment and materials scheduling, and use a modular approach to project management. These tactics will help improve productivity and manage costs in a tight labor market – two key concerns for owners in this sector.
“We’re seeing some advancement of processes and equipment through the use of technology, said Don Thorn, president at Welded Construction. “The long, large-diameter pipes will probably be done with mechanized welding in the future, and that will certainly help with the craft shortages to some extent. As a result, we will need people with experience utilizing mechanized welding equipment and increased training activity from our labor forces.”
In Canada, oil/gas companies and oil sands operators are overcoming productivity issues by investing more heavily in innovative technologies. In a recent FMI research study focusing on the Alberta oil/gas and oil sands industries, conversations with owners, EPC (engineering, procurement, construction) firms and energy infrastructure construction companies revealed some widespread dysfunctions among project stakeholders, which have resulted in significant project cost overruns and low project performance on numerous high-profile projects (Exhibit 1).
In light of these industry challenges, forward-thinking companies are looking at new ways to collaborate with project partners to improve overall project performance – and ultimately, corporate profits.
The following case study highlights an innovative partnership between two firms – JV Driver, a Canadian industrial construction company, and Intelliwave Technologies Inc., one of JV Driver’s preferred suppliers. It shows how these two firms are dramatically improving site logistics and reducing rework through effective equipment and material tracking in the oil and gas sector.
Redefining Field Logistics
Since 1989, JV Driver of Canada has been providing industrial construction services to the oil and gas, energy, petrochemical, forestry and mining sectors. Over that 25-year span, the company has come to appreciate the value of innovation and technology in ways that many competitors have yet to recognize.
“Innovation is definitely a big part of what we do,” said Dale Beard, president, Intelliwave Technologies Inc., one of JV Driver’s Preferred Suppliers. “We’re changing the way construction is done and using innovative technologies that have already been tested by other industries – not just in construction.”
In the construction world, about two-thirds of projects’ costs are spent on materials and equipment (30%), while the remaining 30-40% is spent on labor. Therefore, being able to manage and track these resources becomes critical in saving on cost and time.
“Construction has typically been very chaotic in terms of handling and tracking materials, just because there are long lead times on parts,” explained Beard. “Often, there are multiple contractors involved and many different hands in the pot.”
To overcome that obstacle, JV Driver turned to Bentley and Intelliwave Technologies to create a solution that would allow them to complete projects using fewer workers than usual. In response, the two software companies developed a site management tool that integrates Bentley’s ConstructSim workface planning software with Intelliwave SiteSense® RFID sensor technology.
SiteSense collects (radio-frequency identification) RFID tag data thousands of times per tag per day by installing vehicle readers onto operational forklifts and other construction equipment, which allows continuous reading of the RFID tags within 1,000 feet of each tag as the forklift performs its daily duties. This tool allows tracking, managing and installation of pipe and other tagged equipment pieces and helps crew foremen lessen redundancy and rework.
“As an industry, we need to continuously improve productivity. New technology can help with this substantially,” W.E. “Bill” Elkington, chairman of JV Driver said. “We find SiteSense has a significant impact on the ability of the project to know where all of its materials are at any given time, and to locate that material effectively. This reduces material handling costs and improves tool time and productivity.”
In 2008, the Construction Industry Institute (CII) examined the number of indirect man-hours (not related to actual tool time, such as building the plant) saved by the use of RFID. Using boiler management as the reference point, the organization found that the average worker using manual systems spent 40 minutes searching for each of the 1,000 parts that are used to make a boiler. Those using RFID took just four minutes to locate each part.
“Inefficiencies in materials management during construction can delay the start-up of a new facility, and the daily loss in production due to a slipped construction schedule can result in mega cost over runs, Beard said.”
When assessing the progress JV Driver has made by leveraging innovation, Beard said owner buy-in has served as a key ingredient in the initiative’s success.
“When an owner takes it under his wing and really supports the technology as a key priority for their project, the more the EPCs and contractors buy into it,” he said. “This is important because if there’s no buy in at the lower levels with the users, then essentially you’ve bought a technology that’s going to be shelved.”
In discussions and project work with industry leaders in the midstream oil and gas construction industry, we have identified five areas construction firms must focus on to remain competitive in the future:
Standardizing and Integrate processes: More often than not, we see midstream oil and gas construction firms grappling with a multitude of project delivery models, tools and inconsistent reporting and billing mechanisms – all of which render daily business activities extremely challenging. Consequently, oil and gas construction firms must start looking into standardizing, codifying and documenting project management practices across the organization.
This approach to standardization doesn’t necessarily translate into one single project delivery method, but rather a portfolio of consistent processes for managing different types of projects across the firm.
Matthew Pfohl, executive vice president at Sopris Systems, said a big challenge is getting “15 to 20 different project delivery models and leaders to agree on consolidating business practices into three or five methods.”
“Although implementing enterprise applications is a critical step, business process re-engineering and organizational change management practices are essential – it’s not as much totally redefining and restarting processes,” he said. “It’s really understanding best practices within the organization and trying to build standardization and automation around them.”
Standardization is also a key step toward streamlining processes and improving communication and collaboration – critical for managing construction projects. Now is the time to plan and invest in collaborative web and mobile-based technology platforms that can take advantage of connectivity delivered through cloud-based applications. Having the ability to deploy and use interoperable technology applications can dramatically improve interactions between the job site and back-office operations while also improving overall company performance.
Getting serious about IT budgets: The construction lags behind other industries in technology adoption by a fairly wide margin. A recent study conducted by JBKnowledge, in partnership with CFMA and Texas A&M University, found “over 30% of construction companies surveyed said their 2014 IT budget as a percentage of 2013 corporate revenue (not building volume) is less than 1%.”
James Benham, co-founder and CEO of JBKnowledge, added that 40% of survey respondents didn’t even have an IT department.
“That’s like letting a high school student operate as your CFO,” he said. “Deep down, most industry executives don’t take technology seriously because they don’t believe that it delivers real return on investment.”
Take a serious look at your company’s technology infrastructure and lead from the top in technology adoption.
Make clear to your employees that you value technology as a critical long-term investment that will shape the nature of your business in the future. Start by forming a real IT department, assign a realistic budget, hire professionals and then include those team members in key strategic conversations.
If you can’t afford to hire full-time staff, find a technology outsourcing company that can provide advisory and application services that help serve your business, such as building information modeling (BIM), material and equipment tracking.
Rethinking talent pipeline: The recent expansion of the U.S. oil and gas industry coupled with the retirement of many experienced supervisors is causing overstretched construction firms to rethink their recruiting, training and succession plans. Successful companies are developing comprehensive construction management training and knowledge transfer programs, shifting knowledge from senior and soon-to-be retiring employees to the next generation and leveraging organizational expertise and best practices across the business.
FMI recommends searching outside the industry for those with solid business, leadership and finance experience.
“Instead of recruiting engineers, consider recruiting business school graduates or construction management graduates,” said FMI consultant Dustin Bass. “We need project CEOs – individuals who possess the business acumen to run a substantial portion of work, manage and lead a workforce such that they can achieve their maximum potential – no matter the size and scope. That said, these types of employees will need an in-depth understanding of the construction business and knowledge of how to increase productivity and performance.”
Building next generation’s leadership: Fast-track leadership programs are becoming critical as experienced craft workers move into leadership and mentor roles, with training of less experienced employees occurring within a very short time frame.
“With the limited amount of skilled labor available, we took many of our company’s highly skilled craftsmen and turned them into supervisors to help manage less experienced workers,” said one industry executive. “These skilled craftsmen went from being welders one month to foremen the next month. This doesn’t necessarily mean they’re good quality supervisors; leadership and mentoring skills are very different from technical expertise.”
Intentional and individual development of a leadership candidate pool ensures the necessary talent is available and at the highest level of preparedness when called upon. Just as the organization must develop a long-term vision, those individuals need to work toward a long-term development goal that yields a return on investment for leadership and responsibility preparation.
Understanding incremental economics: A highly competitive landscape has transformed standard estimating procedures into a game of marksmanship. Understanding the total costs for each project with a picture of how the costs break down are the first steps in knowing where and how you can improve profit margins. Having a solid hold on construction costs, fixed-wage regulations and subcontractor and supplier rates is also important, both from a qualified bidder standpoint and from a strategic standpoint.
In another vein, deep knowledge of estimating can provide you with new ideas for being more productive and alert you to early warning signals that subcontractors might be in trouble. Understanding the risk brought on by your subcontractors and your employees has become a critical responsibility in today’s risk-averse oil and gas construction industry.
As companies have discovered, innovation is a key requirement for leading construction firms looking to break out of the traditional ties that bind them to mediocrity within the industry. With almost two-thirds of the typical project costs spent on materials and equipment, and the remaining 30-40% allocated to labor, construction firms have to tighten up their operational strategies and procedures or risk being left behind.
As the U.S. midstream oil and gas construction industry continues to post impressive growth, everything from high cost overruns to delayed projects to declining productivity will take a toll on bottom lines. By focusing on key metrics like the productivity formula, and by embracing new, technology-centric methods and strategies, companies can implement groundbreaking business practices not thought of previously.
This, in turn, will help the most progressive midstream oil and gas construction firms improve productivity and manage costs in today’s extremely competitive, labor-constrained business landscape.