MUSKRAT FALLS: THE ‘SKINNY’ ON COST OVERRUNS

My
Blog Posts and letters to The Telegram have mostly dealt with the arbitrary approach of the
Dunderdale Administration and the consequences of the ill-conceived Muskrat Falls
project both for the public treasury and for democratic government. 

I am a
fortunate person; having served two Premiers for a total of eleven years, I
left the service of government to become engaged a business career, now
spanning nearly three decades, that included construction and development.  While I am not an engineer, I have learned
much from some very good engineers and other construction professionals
including some of the things contained in this article.

Experience
is often the ingredient that offsets construction risk.  Right? 
Well, not always.  Ask yourself
this question: If experience alone were sufficient, why do oil sands projects
continue to experience huge cost overruns despite the fact that large
conventional projects can almost be now characterized as cookie cutter? Even
SAGD and similar technologies are far more technically simplistic.




Canadian
Natural Resources, Imperial Oil and Suncor have been engaged in mega projects,
in the oil patch, for over thirty years. 
Vale Inco boasts lengthy world class expertise, too. While experience is
not nearly an antidote to cost overruns, having none is a seriously deficient
method of warding off disappointment (a.k.a. bankruptcy).

 Nalcor has no experience in large scale
construction. 

Senior
management will refuse to recognize the importance of experience now; but as
design issues and other problems emerge on the Muskrat Falls project, their
inexperience will start to show. 
Overwhelmed bureaucrats at Nalcor will increasingly defer to SNC
Lavalin, the engineering, procurement and construction management (“EPCM”)
organization chosen for the Project.

Deferring to
engineering houses, such as SNC, is one of the prime reasons that these mega
projects get in trouble. That is less a comment on SNC than on their and other
similar companies’ orientation and self- interest. 

Such
organizations will not contractually take on any risk and they make most of
their income from engineering hours. It is their bread and butter. When owners
depend on such organizations, the heads of engineering houses gleefully rub
their hands together and get ready for another big payday. Such deference suits
their business model.  It allows them to
capitalize on the chaos in projects which owners realize only when it is too
late, when such projects are off the rails. 

In the
engineering house, that cost reimbursable contract world, chaos equals cash.
Suffice to say: deference to engineering houses is the equivalent of putting
the fox in the hen house.

That’s the
engineering side of the mega project. Next is the contractor side.  This is how one highly experienced project
manager explained how the system works: 
as soon as the contract is awarded on a large project, the first to show
up are not the ones who will fire up the machinery.  No, the first people on the construction site
are the contractor’s lawyer, the estimator and the project manager.  

Every word
of the contract and the scope of work is reviewed and compared with what is
demanded by the Owner.  Discrepancies and
inevitable design changes become opportunities; their related costs start to be
added up even before one piece of material or equipment arrives.  In essence, he added, cost overruns begin
before the project does. In the contractor’s business model, the claims
department is a major profit centre.

As much as
Nalcor may tell you that it has control over project costs, the simple realty
is that it is in no position to estimate a final project price for Muskrat
Falls.  Nalcor will rely on an estimate
most likely generated by SNC.

When
engineering houses prepare estimates the process is hardly what one might call
accurate or refined.  They take an
estimate of engineering hours and price it; then they add the cost of major
equipment purchases (which they are reasonably good at pricing). However, to
arrive at a full price estimate, they simply rely on multiplying factors to the
engineering and equipment estimates to capture the remaining 70-80% of the
project costs such as materials and indirect and direct construction costs.

This use of
factors is akin to sticking your thumb out into the wind to see which way it is
blowing. And, as several decades of examples have proven, when it comes to estimating
final costs of mega projects, engineering houses are not very good at it.

Ultimately,
all of this will get lost in the fog of managing a major construction project.
Bureaucrats at Nalcor will keep on spending money until either the work is
completed or the money runs out. 

Problem is:
i
t’s your money.
Des Sullivan
Des Sullivan
St. John's, Newfoundland and Labrador, Canada Uncle Gnarley is hosted by Des Sullivan, of St. John's. He is a businessman engaged over three decades in real estate management and development companies and in retail. He is currently a Director of Dorset Investments Limited and Donovan Holdings Limited. During his early career he served as Executive Assistant to Premier's Frank D. Moores (1975-1979) and Brian Peckford (1979-1985). He also served as a Part-Time Board Member on the Canada-Newfoundland Labrador Offshore Petroleum Board (C-NLOPB). Uncle Gnarley appears on the masthead representing serious and unambiguous positions on NL politics and public policy. Uncle Gnarley is a fiscal conservative possessing distinctly liberal values and a non-partisan persusasion. Those values and opinions underlie this writer's views on NL's politics, economy and society. Uncle Gnarley publishes Monday mornings and more often when events warrant.

OPINION POLL OVER-RATES INEFFECTIVE TORY OPPOSITION

Having survived in spite of themselves, in Opposition the Tories have been lazy and uninspiring.  The fact that it is summer, and the House of Assembly is closed, admittedly makes their job tougher, except that the Party’s manifest weakness is not a seasonal problem.

REMEMBERING CABOT MARTIN (1944-2022)

He was an exceptional person. A gifted intellect for sure; irascible and argumentative, too. What endeared him to many was not just that he was analytical and insightful, but that he was honest and forthright. He was a public policy wonk; resource policy interested him most. He loved to travel and read; people, with something to say, were always important.

GNL RUSHING INTO ANOTHER “SCHEME”: CABOT MARTIN

I must say that after the Muskrat Falls fiasco, I thought our government had finally learnt its lesson and would not to rush into another such scheme where calling it “green” was enough to suspend all critical analysis.

2 COMMENTS

  1. Very good description of how these firms do business. Had the unfortunate experience of overseeing a construction project for a non profit on the Labrador coast.
    What a battle, won some lost some, could have made it all easy by turning blind eye or going over to the dark side.
    Chose the option of sleeping easy at night.

    Amazes me that this way of doing business does not garner more publicity.

  2. The bigger they get, the more the chances of some form of large scale corruption seeping in. Many of the people within an organization may be blissfully unaware of these elements but every organization that has grown too large can fall prey to corruption.

    Our myopia with the mantra that "bigger is better" is what is helping push this mega dam project along. Politicians see the "big" job numbers, "big" business gets the lions share of the contracts, and so forth. Of course, with "cost plus" clauses built in, the corporations can't lose.

    Our province's obsession with mega projects and big business is partially to blame for the steady diet of failures over the past fifty years and comes from this "develop or perish" approach.

    Small business can be productive and stabilize an economy, but our governments want the glory and things that make a "big" splash.