Guest Post by the "Anonymous Engineer"
Impact
of Labour Productivity on
"Base Estimate" for the Muskrat Falls Project
After sixty two days of inquiry and sixty two witnesses I
thought it might be useful to offer my observations of what has been disclosed
so far. I am also keenly interested in Phase II, which will deal with
post-Sanction issues, in particular the matter of the egregious cost overruns, which have been experienced on the project.
In this regard, it is my intention to offer readers a mathematical analysis of the impact of construction labour productivity, on the project sanction estimate the low-balling of which, I believe, added greatly to bringing costs to their current level.
But, first, here are my initial observations of Phase I of the Inquiry's work:
In this regard, it is my intention to offer readers a mathematical analysis of the impact of construction labour productivity, on the project sanction estimate the low-balling of which, I believe, added greatly to bringing costs to their current level.
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| Former Nalcor CEO Ed Martin |
But, first, here are my initial observations of Phase I of the Inquiry's work:
1.
It is abundantly clear that Nalcor deliberately misguided
and misled government departments and other organizations that had an
“oversight” responsibility. These include as a minimum, the Ministry of
Finance, Ministry of Natural Resources, Board of Directors of Nalcor, Joint
Review Panel, the Public Utilities Board and MHI. Information
that provided a strategic disadvantage to the project was rejected.
2.
Nalcor betrayed the trust placed in it by other
Government Departments leading to a feeling of anger amongst the effected
Government departments. These departments “swallowed whole” any and all
information provided by Nalcor based on their implicit trust of Nalcor.
3.
Nalcor low balled the estimate to secure project
approval, making contingencies inappropriately low and dropping “Strategic
Risk.” The advice of industry renowned experts suggesting higher contingencies
was ignored by Nalcor, who made every effort to restrict access to the base
estimate and estimating data.
4.
The construction schedule was at level P1, or P3, that is the
schedule was essentially unimplementable. A P75 schedule, most suited for a
project of this magnitude and complexity, would have taken 21 months longer,
together with the associated costs.
5.
Expert Consultants reports which were not
favourable to the project were altered, suppressed, or altogether removed from
public circulation. Nalcor requested the consultants to alter their findings to
a more favourable tone supporting the project. Some of the consultants rejected
Nalcor’s requests.
6.
Government officials moved from being in a
“judging role” to being advocates for the project, completely losing their
objectivity, becoming passive by standers.
7.
Phase I provided no serious debate about productivity, which
was essentially glossed over. Base upon my experience with the Project, I
believe that the issue is a matter of paramount importance in arriving at the
larger question of why such cost overruns occurred.
8.
The purpose of this write up, therefore, is to assess issues around construction productivity more fully and to
consider it’s impact on the “Base
Estimate”.
The analysis of construction labour productivity is performed with information in the public domain, principally from the Grant Thornton Report.
The Grant Thornton
slide deck, slide 36, shows the following table:
To anyone knowledgeable of Project Management and Estimating, it is immediately apparent that the ratios of numbers are completely incorrect.
The numbers just don’t fit.
Each of the gaps will be discussed in turn.
1.
Commitment
Package Cost $ 4,588
The
SNC Lavalin Senior Estimator, Paul Lemay stated in his testimony that there is
a 20% allowance for productivity and a $ 300 million allowance in the estimate
to cover productivity. This figure is nowhere near sufficient particularly
when working with unionized labour agreements, as the following analysis will
illustrate.
The
Commitment Package Cost includes the labour, construction equipment, specialized
equipment such as turbines, converter stations, switchyards, transmission lines
and towers and material required to construct the project. As the project is
labour intensive, project costs are enormously sensitive to labour
productivity.
The 20% allowance carried in the base estimate
is consumed by routine items such as morning work session - tool box talks,
coffee breaks, washroom breaks, afternoon work session – self clean up prior to
lunch , return to work stations, coffee breaks and washroom breaks, quitting
time – clean work station and self clean up. These items are inherent in any
construction project, even in condominium construction in Toronto, Montreal or
Vancouver.
In
the harsh construction environment of Labrador, there are location specific multi-variable
productivity factors, unique to a northern Canadian climate, that must be
considered, namely:
1.
Remote location
2.
Harsh environment
3.
Sub -artic climate
4.
Short construction season (long winter)
5.
Conditions – site congestion
6.
Worker fatigue
7.
Camp accommodation ( no separation of work and
off work)
8.
Work interruption due to time off
9.
Work supervisor interruption due to rotations
10. Continuous
learning curve due to non returning workers
11.
Continuous learning curve due to non returning
supervisors
The cumulative effect of these
factors is enormous – in the order of a multiple of 1.5 or 2.0 – say 1.8.
The impact of this productivity
factor on the Commitment Package Cost of $ 4,588 million is assessed as
follows: (All figures are in millions of dollars)
As this is a labour intensive
project, it is a fair assumption that 50% of the Commitment Package cost is
construction labour, supervision and construction equipment; hence $ 4,588 x
50% = $ 2,294. Of this 70% is construction labour and supervision = $ 2,294 x
70% = $ 1,606. If the labour productivity is 1.8, then the incremental cost of
poor productivity is $ 1,606 x 80% = $ 1,284. The package cost then becomes $
4,588 + $1,284= $ 5,872. Add another $ 150 for the consequential cost of camp,
bussing, medical security, air travel, sanitary services and the cost becomes $
5,872 + 150 =$ 6,022
The package cost of $4,588,000 in the
original estimate becomes $6,022,000 once the labour productivity of 1.8 is
applied.
2.
EPCM
Services
The ratio of EPCM to the package cost is 7.6%.
This is inappropriately low for a
project of this size, complexity and duration. A ratio of 12 to 15% is more suitable. The
revised EPCM cost becomes 15% of $ 6,022 = $ 903.
The revised cost of EPCM becomes $ 903M
3.
General
Conditions and Owners Cost
These
are prorated in direct ratio of the original estimate.
4. Sub-Total The subtotal is recalculated with the updated numbers.
5. Escalation – Prorated according to the subtotal.
6. Contingency – Prorated in the same ratio in the Grant Thornton report page 62, for a P75 probability of successful project implementation. Cost $2,321
The updated table adjusted for labour productivity , EPCM
and contingency is as follows:
The impact of labour productivity and having the correct
amounts for EPCM and contingency at P75 are clearly apparent. These push the
estimate over the $10 billion mark.
All this information and data was available in October of 2012, long before
project sanction.. It was not in Nalcor’s interest to do so. Therefore, it was
not done.
Seemingly, this is the reason why senior executives of
Nalcor did not want anyone, particularly
competent consultants, getting close to the estimate as they could have easily
worked this out. With a $10 billion dollar price tag there
would not have been a project.
A comprehensive review of the estimate was never done at a
detailed level as it had no chance of approval. Nalcor strenuously opposed a “
deep dive” into the estimate, depriving consultants MHI, Validation Estimating
and Westney Consultants access to the estimate except at a summary level.
The project sanction estimate of $6.2 billion (excluding
financing costs) was an Executive Decision and utterly wrong. The correct figure was about $ 10 billion plus. Nalcor knowingly and deliberately understated
the project sanction estimate by $4
billion.
Suggestion
to the Commission of Inquiry
Finally, I have this suggestion: please have John Hollmann
of Validation Estimating and or Richard Westney of Westney Consulting assess
the impact of construction labour productivity. The results will be very
revealing.
It will be equally
interesting for the Commission of Inquiry to compare the above
referenced estimate to the present
forecast at completion.