In tough times chemical companies often have placed capital projects on hold. Investments in such projects then typically rebound over time as overall economic conditions improve. After all, demand for more-efficient production facilities and need to replace aging assets provide compelling ongoing drivers for such capital outlays.
Unfortunately, many firms in their haste to minimize costs "sunk" into projects shut off the resource "valve" to the projects. They disband project teams, immediately lay off people, and halt funding activities without bringing the project to a logical stopping point for efficient project restart. This results in a waste of company funds.
Instead, developing a project slowdown/restart plan (PSRP) can maximize efficiency in the use of capital.
Consider a PSRP whenever projects either are being slowed down or placed on hold until economic conditions improve enough for restarting them. In most cases teams have completed considerable planning work and expended significant hours and costs in developing technical documents, project execution plans (PEP), cost estimates, schedules, etc. — valuable work that shouldn't go to waste.
A PSRP is as important for a stalled project as a PEP is for a project that's moving ahead. Without it the project team flounders, wondering what it should be doing, what the deadlines are, how documents should be packaged, etc. The PSRP defines these for the slowdown period and also in preparation for eventual restart of the project.
Besides information already documented in the latest PEP revision, the PSRP typically includes:
• Project slowdown reasoning. What project, company or marketplace issues (e.g., pricing, volume, increased raw material costs) have led to the slowdown or hold?
• Restart timing expectations/assumptions. Based on current information, what's the project's expected ramp-up or restart time (one to six months, six to12 months, or longer)?
• Slowdown/restart schedule. Given the ramp-up or restart expectations/assumptions, what's the schedule to slow down the project and effectively reestablish traction to achieve the targeted project completion date?
• Contract strategy. In most cases contracts already have been awarded for support services and possibly equipment and material purchases. How will these contracts be addressed to maximize the benefit to the project and the company? (Will the contracts be extended? What about storage and maintenance of equipment and materials?)
• Resource retention plan. What's the strategy to retain/reassign team resources or ensure they're available when the project is restarted? (Will management commit to keeping key project team members and put them on other projects during the slowdown period?)
• Capital reduction strategy. How will remaining project team members minimize non-value-added capital spending during the slowdown period?
When investment funds are tight, chemical companies generally reevaluate projects and place them into one of five categories:
1. Going forward — present execution plans are maintained for strategic, regulatory or other reasons, for example, for regional market penetration or environmental or safety compliance.
2. Short-term hold — restart is likely in one to six months when specific market conditions improve, e.g., stronger growth in a developing country.
3. Recycled — long-term economic trends might change the scope or execution planning, requiring reassessment, e.g., of whether a positive but marginal profit margin will hold up or whether lower-cost materials and equipment will be available.
4. Long-term hold — the delay will last six to 12 months or longer until adverse economic trends abate, for instance, once current market volatility calms down.
5. Cancelled — unfavorable long-term economic trends probably won't be reversed, e.g., a shrinking market or a company decision to exit a business area.
A PSRP obviously only applies for projects in categories two to four.
Initiating the Plan
Most organizations miss opportunities for capturing the full value of work done before the slowdown. To gain this value, it's essential to develop a PSRP before reduction or demobilization of the project team (see Figure 1).
The PSRP should be initiated as soon as the slowdown is announced and should be fully in place when the project team is partially or fully disbanded. The PSRP then becomes the basis for establishing an updated` PEP when the project is reauthorized and the team begins to remobilize.
The reasons for this timing are obvious. The team needs to strategize what it wants easily retrievable when the project gets reauthorized. If management wishes to retain some key team members, how will this be achieved? Can they be assigned or loaned to smaller projects until needed? Will purchased materials and equipment be maintained, shared or sold to other projects?
Once the decision to place a project on hold or into recycle is made clear, it's important to establish objectives for the near term and, in some cases, to define signposts for its restart. The cost and schedule effects of the slowdown must be clearly understood and expectations defined. Clearly document these expectations and signposts in an updated PEP and communicate them to the project team and key stakeholders. The updated PEP also must address issues of destaffing and restaffing the project.
The PSRP may cover opportunities for improving project performance after the restart. This is especially true if the project was placed on hold during a preauthorization phase like the preliminary engineering (Pre-FEED) or basic engineering (FEED). The project may benefit from marketplace changes such as:
• lower pricing of equipment and raw materials;
• faster delivery of long-lead items;
• more attractive construction contracting terms and conditions; and
• better construction labor rates or work rules.
As economic conditions improve, projects put on hold will begin to regain life. An updated PEP will be one of the first project-management deliverables required, preceded only by the revised business case and facility business/project objectives. If planned well, the PSRP will form the basis for the PEP. Indeed, the PSRP's content is intentionally designed to retain some, if not most, of the work effort involved in developing the original PEP. The PSRP will have defined the level of completeness of the original project documentation, desired resources to efficiently restart planning and execution efforts, cost incurred to date, and expectations for the level of effort required to complete the project.
If business climate changes affect the project's scope, the PEP obviously must reflect these changes. However, the PSRP still will be useful in communicating what was previously accomplished and what remains to be completed.
Upon restart, it's highly advisable to hold a kickoff meeting bringing together the project team, stakeholders, key contractors and suppliers. This meeting should:
• review the PSRP and updated PEP;
• achieve alignment of project goals and objectives;
• examine work performed previously and ascertain its applicability given current business objectives;
• consider revisions in project execution objectives (cost, schedule, contracting strategy, etc.); and
• discuss and finalize the restaffing plan.
A Case History
A diverse multinational chemical company was executing a major (about-$200-million) capacity expansion project for a U.S. Gulf Coast site. The firm hired an engineering contractor and a construction manager, completed basic engineering (FEL-3), and approved advanced funding to start the engineering/procurement/construction phase of the project by soliciting and conditioning bids for key long-lead equipment.
Suddenly, major changes occurred in the business environment. Demand dropped significantly as some customers switched to a lower-cost competitive product; the company decided that, at least in the short term (six to 12 months), the expansion didn't fit into its strategic plan. So, the project was placed indefinitely on hold.
Fortunately, the company charged the project director with preparing a PSRP. The approved PSRP led to several actions, including:
• The decision to place the project on hold was immediately communicated to internal stakeholders, project team members, external contractors and potential suppliers.
• Design work was allowed to continue for a few weeks to complete preparation of critical engineering work packages. By doing this, work could commence in an efficient manner upon project restart.
• A small cadre of internal and external engineering resources was retained on the project for a short time to resolve critical outstanding issues.
• External contracts and purchase orders either were cancelled, placed on hold, or contract termination dates were extended.
• With support of discipline department managers and human resources, project team members were reassigned to short-term projects with the understanding that they could be recalled to this project within a reasonable timeframe.
• A project status report was prepared. It contained an updated cost report that reflected the latest quoted equipment costs and other committed costs; a generic schedule that incorporated the delivery dates obtained from equipment and material quotations; a risk register that documented risk items and the plan for mitigation; and a listing of outstanding technical and execution issues that remain on the project.
A Valuable Tool
By implementing the PSRP approach, companies can ensure better stewardship of their capital funds and give themselves the agility to more efficiently and cost-effectively restart projects. This can provide a crucial competitive edge.
Nat D. Schatz is an executive associate at Pathfinder, LLC, Cherry Hill, N.J. You can e-mail him at [email protected].