Eight Key Levers for Effective

Large-Capex-Project Management
Introducing the BCG LPM Octagon

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Eight Key Levers for

Effective Large-CapexProject Management
Introducing the BCG LPM Octagon

Rafael Rilo, Philipp Gerbert, Alexander Koch, Jean Le Corre, Micaela Martelli,
and Daniel Jimnez
October 2012

AT A GLANCE
Executing large, capital-intensive projects such as mines, power plants, and oil and
natural-gas fields has become increasingly difficult in recent years. As a result,
these projects require greater investment and entail greater financial and operational risks, not only for the developers that own them but also for the contractors
tasked with building them.
An Increasingly Challenging World for Large-Project Management
Changes in demographics and the increased industrialization of large emerging
markets have increased the demand for raw materials and energy, a trend that
will only intensify in the coming years. Projects in these sectors have become
larger, more complex, and more expensive. As a result, typical construction
issuessuch as delays, cost overruns, and quality problemsnow have far
greater consequences.
Developing an Effective Approach to Project Execution
In this environment, the ability to more effectively manage the development of
large-capex projects can have clear competitive advantages. BCG has identified
eight key levers that project owners and contractors can use to ensure that these
projects are developed on time, on budget, and within required quality parameters.

Large-Capex-Project Management

rojects involving large capital expenditures, such as the development of

oil or natural-gas fields, power plants, and metal-ore mines, have become
significantly more challenging in recent years. First, they have become larger and
more complex. Demographic shifts and the industrialization of large developing
economies have led to greater demand for energy and raw materials, and thus for
increased production. Second, these resources are increasingly sourced from less
accessible parts of the world, often in emerging markets, where business operations
face unique challenges. In addition, extremely promising markets attract multiple
competitors, further raising development costs at a time when credit is less available than in the past. Finally, dramatic swings in commodity prices affect the
economics of large-project development.
These changes are not going away. Investment in large-capex projects is expected to
increase dramatically in the coming years, requiring greater coordination among a
larger number of market participants. (See Exhibit 1.) As a result, any problems
that occur during developmentsuch as delays, cost overruns, and quality issues
have a correspondingly larger effect on the financial performance of these companies, as well as on engineering, procurement, and construction (EPC) contractors
and engineering, procurement, and construction management (EPCM) contractors.
In response, companies have sought to implement quality control programs, to
issue more frequent project-status updates, and to transfer a larger component of
the risk to outside contractors. While such measures can help, they are superficial
and ultimately insufficient, because they do not address the core need for a new
approach to project management.
The Boston Consulting Group has developed a more comprehensive approachthe
BCG LPM Octagonwhich comprises eight key levers that companies can pull to
fundamentally improve large-capex-project management. These practices can help
companies ensure that their large projects are completed on time, on budget, and
within expected quality parameters.

An Increasingly Challenging World for Large-Project

Management
Each of the factors driving these changes in large-capex management merits a
closer look. As noted above, demographics are one key element. With world population projected to reach 7.7 billion by 2020 and global GDP growing by 4.2 percent
per year, according to the U.S. Energy Information Administration, demand for

The Boston Consulting Group

Increased investment
in large-capex
projects in the
coming years will
require greater
coordination among
a larger number of
market participants.

Exhibit 1 | Investments in Large Projects Are Expected to Swell in the Long Term
Annual investment required over the next decade, selected sectors
$billions

1,500

80

32

1,146

Shipbuilding

Other1

Total

125
1,000

251
203

500

455

0
Oil and gas,
exploration
and production
Oil

Gas

Aerospace

Coal

Power
generation

Mining

Combined cycle gas turbine

Nuclear

Hydro

Wind

Sources: European Central Bank; International Energy Agency; Goldman Sachs Group, 330 Projects to Change the World, April 2011; Oil and Gas
Journal; Red Elctrica de Espaa; Boeing, Current Market Outlook 20112030, March 2012; Engineering and Mining Journal, Annual Survey of Global
Mining Investment; Raw Materials Group; BCG experience and analysis.
Note: Exhibit assumes an exchange rate of $1.33 to 1.00 (2010 average).
1
Other includes liquefaction and regasification, refining, and ethylene.

basic commodities like oil, gas, minerals, and power will continue to increase. Demand for aluminum, for example, is expected to grow more than 10 percent each
year over the next five years, and demand for natural gas is estimated to increase at
2.4 percent per year through 2020. Crude-oil demand is projected to rise from
approximately 80 million barrels per day to 85 million. More than half of the
crude-oil and gas capacity projected for 2030 has yet to be discovered, let alone
developed, which will require an annual investment of $455 billion over the next
25 years to ensure supply.
Such expansion may seem outsized, but it is in line with the growth of these
sectors over the past decade, during which the slowdown of the 2008 to 2009
financial crisis was merely a short-term disruption. Capital expenditure in the
global mining sector grew 40 percent per year from 2003 to 2008, dropped almost
8 percent in 2009, and quickly bounced back to previous investment levels a year
later. Investments in refining have grown 5 percent per year since 2003, reaching
$34 billion in 2010. All these growth rates are in excess of localand global
GDP expansion.
Worldwide, these factors have resulted in major capex projects becoming larger and
more complex. (See Exhibit 2.) The average costs of investment in mining projects
more than tripled from 2005 to 2010. Greater project size significantly increases
on-site management challengeslarger numbers of players participate, structures
are more sophisticated, and engineering sites are more spread out. The incorpora-

Large-Capex-Project Management

Exhibit 2 | Investments in Mining Projects Have Grown Dramatically

Since 2005
Average investment
in mining ($millions)

Largest single project

($millions)

1,000

15,000
x3

800
10,100

10,100

10,699

11,297
10,000

600

513

400

200

527

542

331

2,253 166

3,000

5,000

190

0
2005

2006

2007

2008

20091

2010

Sources: Engineering and Mining Journal, Annual Survey of Global Mining Investment; European Central Bank.
1
Because information for 2009 is lacking, 2009 costs were calculated as the average of 2008 and 2010.

tion of more-sophisticated technologies into the project portfoliosuch as 3G

nuclear plants, deep-sea oil rigs, and offshore wind facilitiescompounds these
challenges, making outcomes far more uncertain.
This effect is particularly pronounced in developing countries with a large concentration of new projects and in remote locations with limited access to experienced
partners. As resources are increasingly sourced from such markets and become
more difficult to secure, project owners are experiencing a greater need for developers and contractors with a good understanding of local authorities, regulations,
content requirements, and stakeholder needs.
In extreme cases, individual markets have become overheated. For example, both
Australia and Brazil have experienced large-scale increases in the mining and oil
and gas sectors. (In Australia, mining investments in 2011 were as much as 80 percent higher than in 2010.) In both markets, developers are seeking to increase the
scope of their operations, and there are a finite number of contractors, builders,
and engineers capable of handling such projects.
As size, complexity, and logistical challenges mount, financing becomes more
difficult as well, since these projects require higher levels of investment. For
example, launching a new aerospace program can cost up to $15 billion, while the
full development of a liquefied-natural-gas project can cost up to $40 billion,
including successive increases in capacity. Capital expenditures already represent a

The Boston Consulting Group

significant part of companies revenues, ranging from an average of approximately

6 percent over revenues at chemical companies to almost 20 percent in the mining
sector. This number is only likely to grow, given the expansion in project scope and
size.
Such financing challenges have been exacerbated by the financial crisis, which
limited the availability of creditor made it available on much stricter terms. As a
consequence, developers are seeking new ways to optimize investments, putting
more cost pressure on the whole value chain. At the same time, high volatility in
commodity prices has disrupted the balance of the value chain, cyclically shifting
power between developers and contractors, affecting the procurement strategies of
all parties, and driving up overall risk.
On the contracting side, a new group of EPC competitors from emerging economies
is upending the competitive landscape. (See Exhibit 3.) Chinese equipment companies in segments such as coal power, boilers, and conventional steam turbines now
supply more than 50 percent of global demand, while in sectors such as wind
onshore they have increased their global share by 15 percentage points, to 25
percent, in just four years. South Korean EPCs are also very active and becoming
more competitive globally, particularly in the power, oil and gas, and petrochemical
sectors. In response, traditional contractors in these sectors have been forced to
revamp their cost structures in order to remain competitive. Moreover, Western

Exhibit 3 | Contractors from Emerging Economies Are Becoming Global Competitors

Chinese companies account for 32 percent of global
EPC revenues from power plant projects

Chinese companies have an expanding

share of the global EPC market
Overseas contract value ($billions)

Revenues (%)

150

100
126
80

105

2
10
23

100
+29%

60

78

40

50

10

12

13

24

18

32

China

18

North America

31

Europe

25

66

15

11

Rest of the world

3 Latin America
Asia

30

20

39

0
2001

1999
2000

2003
2002

2005
2004

International market share

of Chinese contractors (%)

2009

2007
2006

2007

2010

2008

6.0 5.3 5.3 7.3 7.3 9.1

Sources: Engineering News-Record; press search; BCG analysis.

Large-Capex-Project Management

developers are not always able to exploit this downward price pressure from new
players, as they often dont have a clear picture of the new entrants capabilities
and the quality of their products.
Many companies have responded to these challenges by implementing measures
such as quality control programs, more frequent status reports, increased pressure
on suppliers, and detailed project-deviation assessments. They also try to transfer a
larger part of the project risk to contractors through restrictive contract conditions.
However, these measures often fail to deliver their expected benefits. In some cases,
they are not systematically enforced. In others, companies take significant action
only after a project has experienced serious delays or costs have so far exceeded the
initial budget that the companys financial condition is affected. In many cases, the
company is simply unaware that there is an underlying need to implement systemic
changes.
In this new and difficult environment, effective large-capex-project management is
a crucial capability. The eight levers of the BCG LPM Octagon, which are described
in detail below, can greatly improve the way that project owners and EPC/EPCM
contractors manage their projects. (See Exhibit 4.) Collectively, they can help
companies improve overall performance and develop their large-capex projects at
lower cost while meeting stringent quality requirements and complying with tighter
schedules.

Exhibit 4 | The BCG LPM Octagon

Project
management
oce

Expenditure
optimization

Excellence in
construction

Access to
scarce resources
and local
content

Design
to value

The BCG
LPM Octagon

Contracting
optimization

Rigorous risk
management

Procurement
excellence

5
Source: BCG analysis.

The Boston Consulting Group

1. Minimize Capital Expenditure Requirements

Minimizing capital expenditure can significantly reduce the overall risk of individual projects. The entire organization should develop a cost-focused culture, adapting
capex requirements and understanding the principal drivers of capital costs. In
addition, companies need an effective monitoring system to help consolidate
results, perform sensitivity analyses on potential approaches, and systematically
collect best practices. This is an ambitious undertaking, but the results justify the
effortsuccessful minimization programs can reduce capex requirements by 10 to
25 percent. (See Exhibit 5.)
In our view, there are six complementary principles of successful capex reduction:

A Cost-Focused Culture. Challenge the projects scope and specifications in its

earliest stagesbringing to bear a deep understanding of cost components, user
requirements, and competitors best practicesin order to identify potential
savings.

Learning Effects. Capture experience effects by standardizing and repeating

processes and designs at both the component and project levels.

Scale Effects. Optimize project size to capture the impact of scaling components
and projects. The reductions in investment requirements can be significant: one
power-generation company identified capital reductions of approximately
35 percent by optimizing scale in one of its projects.

Exhibit 5 | Programs to Minimize Capital Expenditure Have Led to Savings in Offshore Oil-Field
Developments
Wells and subsea systems
make up 74 percent of total
capex

Subsea systems

18%

Experience eects such as standardizing components,

reusing resources, and streamlining the supply chain for critical
items resulted in substantial cost reductions

Wells

56%

11%
10%
11%

23%
18%

Subsea systems

12%
Wells

No experience
eects

Basic experience
eects

Accelerated experience
eects

Source: BCG experience.

Note: The remaining 26 percent of project capex comes from floating storage, production, and offloading vessels, which are generally built by
outside vendors and sourced after completion.

Large-Capex-Project Management

Supply Chain Optimization. Adapt the supply chain (for example, in make-or-buy
decisions and choice of supplier location) to more effectively meet the companys needs.

Convoy Effect. Understand the impact on costs of developing similar projects

consecutively or in the same location.

Location and Technology Effects. Understand the potential impact of future

technologies and locations on the overall cost of the project or program.

2. Design to Value
The second lever applies primarily to EPC/EPCM contractors. In the current context
of increasing complexity and competition, contractors and equipment providers
must ensure that their offers are aligned with actual client needs and are available
at the lowest possible price. It is therefore critical to thoroughly understand the
clients value requirements. For example, some clients are focused primarily on the
initial investment, while others may consider long-term costs (factoring in both
initial construction and lifespan maintenance). Still others may seek reliability and
plant availability over cost considerations. In all three cases, the contractor must
understand the developers value targets and propose a technical design that hits
those targets. A design-to-value approach can reduce costs between 10 and 15 percent for existing products; in new equipment, up to 50 percent of costs can be
avoided before they are even incurred.
There is a second component of the design-to-value principle: contractors must
evaluate their own internal operations to ensure that they are as cost efficient as
possible. This is increasingly important for incumbent players, which are facing
increased price competition from operators in low-cost countries. In the U.K., for
example, EPC contractor prices for most power-generation technologies are projected to fall significantly through 2020, as Western operators are forced to reduce costs
to match the offerings from new global challengers. This cost gap can be significantup to 25 percent in the unit costs of coal power plants in 2010.
At the same time, these new EPC challengers must be willing to expand out of their
home base in order to better understand customer requirements and translate
them into technical specifications. In particular, they need to face the perception
gap and adapt their offer to meet stringent quality requirements without losing
their cost advantage.
For all competitors in the marketincumbents and global challengers alikefour
principles can help in pulling the design-to-value lever:

Value-Based Offer. Understand clients key purchasing criteria and design projects
to meet their needs.

Optimized Technical Specifications. Identify the specifications driving cost and

price for clients, simplify them while maintaining performance and quality
standards, and redefine them for future projects. For example, a power equip-

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Contractors and
equipment providers
must ensure that
their offers are
aligned with actual
client needs and are
available at the
lowest possible price.

ment vendor avoided overspecification by applying market standards and

reduced component prices, generating savings of roughly 20 percent on total
cost of ownership. Combining this principle with global sourcing initiatives can
yield greater impact.

Many companies lack

a strategic focus on
each category of
goods procured and
cannot effectively
assess procurement
performance.

Standardization and Modularization. Standardize designs for components that

can be used on multiple projects. Contractors can achieve scale effects with
procurement volume for these components, replace unique designs with proven
ones, and reduce delivery times and overall complexity.

Upgraded Existing Designs. Modify initial designs to reach incremental new

targets of cost, quality, and/or operability by applying new technologies, involving suppliers in project/product development, and collaborating with suppliers
from low-cost countries.

3. Apply Rigorous Risk Management

As the risks of large-capex-project development grow, a comprehensive riskmanagement program becomes ever more crucial for project owners. In order to
be successful, programs should apply a tiered approach that assesses projects at
three levels:

Strategy Level. Design strategic positioning for all capital expenditures aligned
with the companys financial objectives and capabilities. Draw clear guidelines
that define acceptable levels of exposure to risk, and define portfolio policies
aligned with this strategic vision (such as the maximum size of projects, capital
expenditure per year, and other metrics).

Portfolio Level. Regularly evaluate the portfolio to differentiate value-adding

projects from value-destroying projects. A clear ranking according to risk and
value will help optimize investment decisions and improve the companys
pipeline by identifying the best option to follow in each situationfor example,
whether to exit the project, address unacceptable factors, optimize performance,
or continue with the project.

Project Level. Exercise ultimate control over project risks even when an EPC/
EPCM contractor is in charge of implementation. This entails understanding
risks at each step in the project, classifying them by severity and likelihood,
determining options to mitigate each risk, and implementing a forward-looking
reporting system to proactively intervene.

4. Develop a Procurement Excellence Program

In many companies, the procurement function is poorly integrated into project
processes. As a result, these companies lack a strategic focus on each category of
goods procured and cannot effectively assess procurement performance. Substandard procurement can have cascading ramifications on a projects timeline and
costs, because a single critical category of goods not delivered in time (or not of
acceptable quality) can delay an entire project for months.

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Large-Capex-Project Management

Category optimization is the single most relevant means of improving procurement

performance. It should be based on a deep knowledge of procurement categories
and spending levels by category; the procurement function should be involved
early on in order to define a sourcing strategy before the budget is committed. For
example, a recent collaboration with a top-five global mining company helped cut
the procurement budget by more than 10 percent, thanks to the appointment of
project procurement managers and the installation of tracking mechanisms across a
$45 billion project pipeline.
Seven principles can help companies optimize procurement:

Supplier Management. Systematically assess and classify current and potential

suppliers, improve the quality of key suppliers, deepen relationships with top
performers, and consolidate supplier bases.

Bundling. Establish transparency in internal purchasing across projects and

locations in order to identify bundling options that can be awarded to the best
suppliers. Establish global tenders and master agreements to capture scale.

Global Sourcing. Source from low-cost countries to capture major cost savings.
Some difficulties may arise (such as inferior technologies or a lack of after-sale
services), but these can be addressed through supplier development and collaboration programs. Global sourcing must be closely linked to standardization
and modularization of designs and components in order to achieve the level of
scale that makes it cost effective.

Demand Management. Adjust procurement quality to the projects real requirements, and understand changes in category demand to more effectively negotiate
with suppliers. For example, a mining company noted that a significant time lag
existed between increases in commodity prices and subsequent increases in the
price of earth-moving equipment. By altering the timing of negotiations to capitalize on this lag, the company identified a potential capital savings of 8 to 12 percent.

Process Excellence. Optimize costs over the entire life cycle of a project, factoring
in not only product prices but also the total cost of ownership. A power generation company that used this approachevaluating the total cost of primary and
secondary equipment and of consumables and spare partssaved 8 to 14 percent in the life cycle costs of key equipment.

Standardization. Bring specifications closer to commercial standards across

projects, and maximize the sharing of items among projects and products.

Make or Buy Decisions. Externalize products or services to optimize costs. Estimate cost reduction potential per category given the companys current position
and future goals, taking into account future demand volumes that could lead to
scale or learning effects.

In applying these principles, companies should establish key performance indicators to regularly monitor the performance of the procurement function and identify

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11

Category optimization, based on a deep

knowledge of spending levels by category,
is the single most
relevant means of
improving procurement performance.

areas to improve. The most relevant KPIs include identified or realized cash savings
per category, the contribution of savings to earnings before interest and taxes,
procurement budget by category, and the number of suppliers accounting for
80 percent of spending.

5. Optimize Contracting Strategy

Contracting strategies are strongly related to business cycles. In periods of high
demand, EPC/EPCM contractors hold the upper hand in negotiations. During
low-demand periods, the power shifts to developers, who are able to demand better
prices and to transfer a bigger part of the project risk to contractors. However, this
shifting dynamic may lead to poor performance and conflicts between players.
Instead, developers and contractors should consider long-term relationships that
create win-win situations that outlast the business cycleespecially given the
current trend toward more complex projects.
Developers need to clearly understand the specifics of the project and the external
conditions of the market before designing their contracting strategy. A key question
for most Western developers is whether to open the contracting process to challenger EPCs, such as those from China or South Korea. Including these new players in
the contracting process will require modifications of traditional project requirements but will also often allow significant cost reductions.
Developing an appropriate contracting strategy for each project involves three
steps:

Developers and
contractors should
consider long-term
relationships that
create win-win situations that outlast the
business cycle.

Identify the projects scope and value drivers. Set expectations and identify the
main value driverssuch as the required execution speed, production targets,
and internal personnel available to manage the projectat the projects earliest
stages. Consider overall risk and project size. In the oil and gas sector, for
example, full EPC contracts are never signed for projects worth more than
$5 billion.

Analyze external market conditions. Understand the range of contract types

available in order to find the one that best fits the project. Assess activity levels
in the EPC/EPCM services market, monitor competitors contracting trends, and
choose between (short term) tactical and (long term) strategic relationships with
contractors.

Define bundling options and contracting guidelines. Identify the packages to be

outsourced and the bundling strategy. Bundle either by project phase (engineering, procurement, or construction) to maximize contractor expertise or by
project module to transfer more risks to contractors.

In addition to determining the best contracting strategy, developers should select

an EPC/EPCM partner using a three-phase process:

First, they should assemble an initial shortlist of potential partners, considering

the quality of engineering services among available contractors, project manage-

12

Large-Capex-Project Management

ment/construction performance, regional presence, and technological prowess,

among other factors.

Second, in the RFP phase, developers must focus on identifying the differentiators among bids that could affect their value, such as project calendar, payment
plans, insurances and guarantees, and penalties, among others.

Finally, during the negotiation phase, developers must clarify the conditions of the
collaboration in order to avoid potential misunderstandings. These include framework KPIs, final scope, timetables, personnel, services, and remuneration scheme.

6. Secure Scarce Resources and Local Content

Most industrial sectors expect sustained growth in demand over the next decade,
and companies are developing a multitude of large projects, often concentrated in
the same regions. As a result, companies have to compete for skilled human capital,
natural resources, infrastructure, commodities, and critical equipment. Proactively
securing access to scarce resources over the medium term in areas where there is a
high concentration of projectsand building a sustainable position for the future
is a key differentiator in large-project development.
With human capital such a large challenge, developers must define their labor
requirements in the context of a projects complexity and potential expansion, and
they must take steps to address quantitative and qualitative gaps. Specifically,
companies should establish a structured workforce-planning model that uses the
following best practices in attracting and retaining talent:

Systematic and proactive recruiting methods

A staffing model to develop talent and ensure the best use of available resources

A training plan to develop the skills of existing staff

Solid career planning to encourage commitment in the workforce

Strategic alliances with contractors to close talent gaps

Natural resources such as water are an increasingly relevant factor in large-capex

projects. For example, ambitious plans to expand uranium production capacity in
Namibia have been put on hold owing to insecure water supplies. When analyzing
the availability of natural resources, companies must work with local stakeholders,
such as governments, communities, and other industries, that have the power to
limit access. Resource management should include supply plans to ensure current
and future operations at the lowest cost, as well as best practices to reduce consumption and a resource stewardship stance to facilitate negotiations with stakeholders.
Assets such as infrastructure, commodities, and equipment can also play a critical
role in a large projects development. Infrastructure is critical to tapping natural
resourcesit must be accurately sized through a top-down analysis.

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13

Proactively securing
access to scarce
resources over the
medium term in
areas where there is a
high concentration of
projects is a key
differentiator.

Price volatility and resource availability are the two factors that can have the most
substantial impact on a projects budget and schedule. To understand the companys exposure to these risks, developers should understand their access to supplies
of critical commodities, their negotiating power with suppliers, the availability of
substitutes, and the impact of a shortage on the projects value.

Price volatility and

resource availability
are the two factors
that can have the
most substantial
impact on a projects
budget and schedule.

Finally, to ensure that critical equipment is available when needed and without
delays, developers should understand the universe of key equipment suppliersincluding global and regional playerstheir prices, and their delivery lead times. The
lead time for the delivery of critical equipment tends to be long, especially during
demand peaks and when local content requirements affect the market. For example,
in the mining industry, a ball mill can take up to 28 months to deliver, while a cone
crusher can take 34 months. One potential solution is to optimize equipment sourcing by bundling orders at the corporate level, giving developers more leverage to
reduce costs and lead times. This also allows companies to share equipment among
projects and reduce demand volatility by considering the entire backlog of projects.

7. Ensure Excellence in Construction

Large projects are, in essence, all about construction. But because all projects are
unique, they often lack the systematic defect-prevention measures and lean process
planning that can be found in other sectors involving more repetitive production,
like the automotive industry. Developers and contractors must seek to reduce waste,
errors, and nonvalue-adding activities that significantly affect costs and project
schedules.
To achieve construction excellence, companies should aim to attain a lean construction flow within the project. Three key principles can help.
The speed-based scheduling management principle aims to create a constant work flow
without bottlenecks or wait times.

System Speed. Divide construction work into sections and subsections that are
small enough to be controlled in short cycles. Sequence the work units in each
subsection to avoid bottlenecks and wait times, and delineate the work sequence in detailed plans, schedules, and charts. The final production plan
should allow for daily controls, so that any deviations can be rapidly identified
and corrected.

Required Capacities. Harmonize effort and capacitysuch as the number of

workers assigned to each taskat the subsection level in order to support the
selected system speed (higher speed will require more capacity). Share the
production plan with subcontractors in order to proactively integrate them into
the planning process. Align external partners to clarify interfaces and obtain
their input in order to optimize the plan.

The pull principle applies the lean concept to the logistics chain to create a stable
and efficient material and resource flow. It ensures that all the required resources
are provided on demand and to required quality standards.

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Large-Capex-Project Management

Materials Planning. Classify materials according to the lead time and delivery
method ( just in time, just in sequence, or others). Link the flow of materials to
the overall production plan, assigning an order signal in the production timeline
depending on the lead time of the particular material. Create an availability
boardupdated dailyto monitor the status of materials for the next five days.

Materials Provision. Link the logistics sequence to the production sequence by

consolidating information on what material is needed, how much, and in what
phase of construction. Use a commissioning system based on pull-demand
management to automatically identify material restock needs without risking
out-of-stock materials.

Materials Disposal. Organize waste disposal processes to reduce costs and help
protect the environment.

Companies applying
BCGs programmanagement-office
approach registered
value in excess of
$25 billion in 2010.

The zero-defect principle addresses quality by stabilizing and optimizing processes.

Gate Cycles. Define a clear control process based on review gates after each
section of the project is completed.

Operational Quality. Use KPIs to measure on-time or delayed performance,

quality (defects and rework indicators), and the degree of subcontractor compliance with other agreement terms. For management purposes, aggregate operational KPIs and follow them during the production plan steering sessions.

Self-Contained Sequence Control. Implement mutual control between work units

via review gates at the beginning of each work unit within the subsection to
detect defects early and correct them immediately.

8. Set Up a Project Management Office

Large projects require strong leadership and proactive management. At many
companies, project management efforts often fail for several reasons. Leaders may
not completely understand complex projects, or they may lack the preparation and
determination necessary to effectively oversee their development. Some companies
approach projects as a series of individual initiatives executed independently,
without the required upfront coordination and planning.
In our experience, these issues can be addressed by implementing a dedicated
program/project management office (PMO). The PMOs role can vary from facilitating the process to assuming full leadership of the projects development. Currently,
29 major companies are applying BCGs PMO approach to 50 programs, registering
a value in excess of $25 billion in 2010. A well-structured PMO should cover three
essential aspects of project management:

Project Governance. Explicitly articulate the structure of the projects governance,

detailing the roles of the steering committee, executive sponsors, and individual
business units. This requires that the PMO have adequate visibility and authority over all corporate functions involved in the project.

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15

Process Design. Define all the major elements of project development, including
human resource requirements, action plans, key metrics, and reporting systems.

Project Execution Control. Identify, evaluate, and solve key implementation issues
on the basis of reports submitted by project teams. Act as a main hub for
addressing these issues. Supervise single teams, help build consensus among
teams, and prepare status reports for executive-level decision making.

ffectively managing large-capex projects in todays uncertain environmentwith costs, complexity, and risk increasing, financing drying up, and
resources becoming harder to secureis a significant challenge. The BCG LPM
Octagon can give project owners and EPC/EPCM contractors a clear edge.
These eight levers can yield significant results. For example, a well-executed
contracting strategy can reduce the total construction cost of a coal power plant
by 25 percent. Excellence in construction practices can eliminate approximately
50 percent of the wasteful activities of a construction site. A procurement excellence initiative that systematically optimizes procurement categories can save
8 percent of total costs initially and an additional 2 percent in each year that
follows.
All eight levers require the organization to focus on performance and to implement
control mechanisms to oversee the development process. Through the correct use
of these eight levers, large-project management can be the successful and profitable
enterprise that companies envision.

16

Large-Capex-Project Management

About the Authors

Rafael Rilo is a senior partner and managing director in the Madrid office of The Boston
Consulting Group. You may contact him by e-mail at [email protected].
Philipp Gerbert is a senior partner and managing director in the firms Munich office. You may
contact him by e-mail at [email protected].
Alexander Koch is a partner and managing director in BCGs Perth office. You may contact him
by e-mail at [email protected].
Jean Le Corre is a partner and managing director in the firms So Paolo office. You may contact
him by e-mail at [email protected].
Micaela Martelli is a principal in BCGs Madrid office. You may contact her by e-mail at
[email protected].
Daniel Jimnez is a project leader in the firms Madrid office. You may contact him by e-mail at
[email protected].

The Boston Consulting Group

17

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The Boston Consulting Group, Inc. 2012. All rights reserved.
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