The million dollar missing link between construction and operation

How often do we hear about new facilities that are substantially delayed, significantly over budget, or plagued by start-up issues? Despite the maturity of the industry, we still struggle with achieving our planned production rates in the critical first months of a project.

In many of these cases, a sufficiently robust approach to operational readiness, commissioning, and ramp-up (OCR) is the common missing link between construction and operation. Not only is OCR the crucial link, but understanding that OCR is a specialist skill is vital.

It’s the glue that enables flawless start-ups, saving companies millions in lost profit and ensuring the long-term health and productivity of critical assets.

OCR is a fully integrated approach to start-up activities that uses component-level planning, skilled teams, and integrated digital tools to ensure a smooth and failure-free handover from construction to operation teams. In previous articles, we’ve discussed what constitutes a good approach to OCR and the most important considerations for executing a successful OCR handover.

Recent world events remind us that the investment and construction phase of projects are years in the making while the window to ramp-up to sustainable, stable operations is extremely short and susceptible to external pressures and unexpected events.

This article will examine the scale of the problem across the industry, identify to what extent we're falling short, and how much it’s costing our businesses. We’ll then illuminate the insights from extensive experience on what a successful OCR organization looks like to bridge the gap.

How much value is lost when OCR is missing or insufficient?

A quick look at the numbers reveals that the losses across the industry are staggering.

According to IPA Global1, 60% of mega projects fail, which means they exceed their project schedule or estimated cost (CAPEX) by 25%, or can’t achieve steady state operation within one month of start-up.

A recent article in The Chemical Engineer estimates the cost for the massive proportion of projects that run late in the Middle East and North Africa (MENA) region alone to be around US$3 billion per year.

Our internal cost modeling using mid-size gold mine projects with $1B investment suggests that a medium operation’s net present value (NPV) can be degraded by -9% from the base case in a long ramp-up scenario or delayed construction scenario, and by as much as -18.8% in a long construction scenario. These all-too-common ramp-up scenarios equate to operational losses of $38M to $79M.

Even the most basic of financial models will show the financial value or early cash generation. Perfecting the business in year twenty offers no value to the original investor. Years zero to five are what will make or break most projects.

Why are we losing so much value through inadequate OCR?

Traditionally, the way most operations view a project has been as a collaboration between two organizations. In this view, the first stage is construction, the second stage is operation, and how well they work together constitutes OCR.

But years of experience across a broad range of industries has taught us that this understanding is missing a vital third organization. A proper holistic project approach includes three independent but intertwined organizations. The first and last stages–construction and operation–are derisked by the formation of the middle organization. This middle organization comprises an entirely separate group of people, processes, and technologies dedicated solely to rapid transition and ramp-up. This is true OCR.

It boils down to a clear view of why capital projects attract investment in the first place. Investors are looking for new facilities or expansions to return cash to a business. That is why they invest the capital–they expect a return. The construction phase is focused on reducing capital and shortening the construction schedule–limiting CAPEX. Operations organizations are focused on lowering costs and increasing volume through variation elimination–limiting OPEX. Neither of these organizations are designed or incentivised to ensure a rapid return on the original investment in an extremely dynamic environment. This is where a focused OCR approach plays a valuable role. The OCR team is highly focused on moving from construction completion to full capacity as fast as possible without sacrificing safety, the environment, and overall sustainability.

New operations continue to lose value early in their lives not because they’re underperforming, but because they aren’t organized to deliver against the needs of the facility at that time. It’s not simply about pouring more resources and money into the ailing mix—you cannot buy time. It’s a question of developing the right structures with the right behaviors, reporting lines, approvals, authority, and specialized skills well before construction is complete. It's about designing and building a facility that's easily commissioned and operated. It’s about preparing a team capable, eager, and excited about operations.

Why OCR must function as a standalone organization

There are several important reasons why successful commissioning and ramp-up activities require the formation of an independent OCR organization.

1. Specialized skills. OCR is a field of expertise unto itself, requiring a highly trained team of experts with specialized skills. Neither construction nor operation teams have the necessary skills already in-house to form their own OCR organization. Additionally, seldom do they have the capacity to dedicate sufficient resources to a properly formed commissioning and ramp-up effort. Our greatest successes are OCR-led with support from operations and project staff.
2. Independent reporting lines. OCR requires a separate set of unbiased reporting lines that are focused on the goal of rapid ramp-up. Dedication to this goal is important in obtaining the right balance. During actual ramp-up an independent approvals authority is critical to manage time-sensitive purchasing, design changes, or resource allocation. The dynamic nature of changes is not suited for operational roles and reporting.
3. Holistic approach. An independent OCR organization is designed to tackle this critical function holistically rather than in piecemeal. A holistic approach enables proper upfront planning as well as full visibility into and control over the necessary and specialized activities that ensure OCR success. No project is completed within a single day. A properly structured and integrated program is destined for success from day one.

A highly successful business requires an optimized project, a rapid ramp-up, and sustained stable operation. These are conflicting goals that need to be managed from the start by an integrated team from three separate organizations. Growing evidence shows that inviting OCR to the table early ensures not only the maintenance of project economics, but in many cases improves the overall viability of an investment.

[1] Industrial Megaprojects: Concepts, Strategies, and Practices for Success, Edward W. Merrow, Wiley, 2011.