Tag Archives: project execution

McKinsey presents ‘mega project’ blowouts and how to avoid them at PDAC

A study presented by McKinsey’s Matthieu Dussud at the Prospectors and Developers Association of Canada’s (PDAC) annual convention has shown one in five “mega projects” completed between 2008-2018 suffered significant cost and schedule overruns.

Out of the 41 projects surveyed – all with a capital expenditure of $500 million or more – 19% suffered a budget overrun of more than 100%. Of these projects, the average schedule delay was 29 months, Dussud said.

Some 44% of the 41 projects were hit by budget overruns of 15-100% – with an average seven-and-a-half month delay – while 17% were “within estimate” coming in less than 15% over the capex budget. Of those projects surveyed, just 20% suffered no cost or time overruns, Dussud said.

The reasons for these problems were multi-faceted, but Dussud, an Associate Partner at McKinsey and Co, said the company’s study had shown a strong correlation between the budget overrun and project size.

For example, 24% of projects with an upfront cost of $500-999 million suffered capex overruns when comparing the feasibility study to the actual cost. At the higher end, 61% of projects with feasibility study capital outlays of more than $2 billion were hit by budget blowouts.

Dussud also said underground mines and higher elevation facilities underperformed against their baselines more consistently in the study, with mining projects built above 3,000 ft (914 m) running overbudget by, on average, 47% and underground mining projects running overbudget by, on average, 55%. Open-pit mines, meanwhile, fared better with 42% of these suffering capital overruns.

McKinsey and Dussud ranked the root causes of mega-capital project cost and schedule overruns in the study, with a difference of opinion seen between owners and contractors.

Both parties agreed that increasing project and site complexities was the biggest problem of eight, but the rankings differed from there on.

From one to eight, mine owners ranked the root causes as follows:

  1. Increasing project and site complexities;
  2. Design processes and investment are inadequate;
  3. Bespoke or sub-optimal owner requirements;
  4. Insufficiently skilled labour at frontline and supervisory level;
  5. Poor project management and execution basics;
  6. Industry underinvests in digitisation, innovation, and capital;
  7. Contractual structures and incentives are misaligned;
  8. Extensive regulation and cyclical nature of public investment.

The contractors, on the other hand, had the ranking as follows:

  1. Increasing project and site complexities;
  2. Poor project management and execution basics;
  3. Contractual structures and incentives are misaligned;
  4. Design processes and investment are inadequate;
  5. Bespoke or sub-optimal owner requirements;
  6. Insufficiently skilled labour at frontline and supervisory level;
  7. Extensive regulation and cyclical nature of public investment;
  8. Industry underinvests in digitisation, innovation, and capital.

Dussud and McKinsey proposed eight key changes for mine owners to increase mining capital project outcome certainty in their feasibility study practices.

This included establishing a prescriptive standard for feasibility studies – part of a broader stage-gate process; building in a systematic and holistic value improvement step to avoid “gold-plating”, and maximising project economics within the owner’s feasibility study approach; leveraging granular benchmarks (including construction productivity metrics) to validate inputs and capex/opex estimates; embedding construction planning, operations readiness and marketing strategy at every step of project study development to de-risk execution and operations; and investing time, effort and management focus on building and optimising an integrated master schedule.

The other three recommendations were:

  • Design an incentive scheme for the feasibility study contractor to enable a “value maximisation, out of the box thinking and transparent mindset” (eg performance bonus based on net present value improvements) and favour “relational contracting”;
  • Setup the foundations of the project’s contracting strategy early during the feasibility study (identify partners, define contract scheme, negotiate terms, etc), and;
  • Build a strong owner’s team with the right capabilities, mindset and behaviours.