Ending the Politics Of Infrastructure…by Benjamin Cheatham

The country’s vast network of highways, airports and seaports historically has been a primary source of competitive advantage, but today our vital infrastructure is like a 1976 Chevy—physically and financially outdated.

While other countries are exploring new approaches, America’s infrastructure strategy is in desperate need of an upgrade.

In addition to being a critical challenge, infrastructure represents an intriguing economic opportunity. Unleashing a wave of creative infrastructure investments in the U.S. will reduce shipping costs, help U.S. manufacturers, directly employ millions of Americans and reduce CO2 emissions from the transportation sector.

The trouble is the way we decide what to build. The decision should be based on the return on economic productivity generated from infrastructure projects, not simply the amount of dollars invested.

Here’s an example of what I mean.

One stretch of highway on the East Coast received hundreds of millions of dollars in federal earmarks. Unfortunately, the road handles less traffic in a year than most major urban highways handle in a week or less. Other examples are the public works whose budgets are set optimistically low but end up doubling or tripling in cost, effectively destroying most of the societal returns for the project.

The opportunity cost is enormous if we continue to allocate resources to major investments that systematically fall short of expectations due to biased estimates, or fund projects based on little more than the exercise of political power.

Languishing Projects

It is also clear that there are a wide variety of very high-return projects that are currently languishing without any identified funding.

We have to understand our investment alternatives, and to do that, we need a non-political prioritization mechanism—something that is badly lacking at all levels of government today.

The mechanism should help to prioritize projects objectively, mainly by force-rankings based on an assessment of economic returns.

One way to do it would be for the administration to create an independent panel to develop a prioritized list of critical national projects and seek authorization flexibility to deploy resources competitively and consistently with panel recommendations.

The critical prioritization lens should be applied not just to new investments but also to ongoing projects. We recommend conducting a rigorous review to prune current commitments to a core set of priorities that will provide major productivity boosts, “de-bottleneck” economic growth and generate appropriate returns on capital.

There are a couple of important ways to do this, and that is to employ user fees and private partnerships and capital as often as possible.

User fees are central to balancing supply and demand in virtually every sector of our economy, and infrastructure is no exception. Prices tied to the true cost of using infrastructure smooth demand by reallocating it to off-peak periods or under-used capacity, reducing overall capital needs.

We also need to create an environment that attracts private investment and partnership—that’s not happening now.

Besides providing needed capital to upgrade infrastructure, private partnerships can improve the discipline of the project selection process by injecting an analysis about the projected returns of a given project. These partnerships also can increase cost transparency, as the true life-cycle costs of infrastructure rehabilitation and maintenance are often underestimated for political reasons.

There are a variety of tools at the disposal of the federal government to advance the use of private capital and operational expertise into state- and locally owned infrastructure.

Among them are pilot programs that specifically award funds based on the level of taxpayer risk reduction; tax-code changes (expanding the use of private activity bonds and leveling the public versus private sector playing field for Build America Bonds); expanding Federal credit support for projects that are tied to the willingness of state and local governments to employ user fees; removing federal restrictions on user fees and reforming some preconstruction processes to elim inate investment uncertainty and expedite time frames for big-payoff projects.

Many lessons have already been learned in the U.K., Australia, Canada and other countries that have had developed public-private partnership programs for many years. While no program is perfect, it is clear other countries have struck a much better balance than the U.S. has uniting diverse political constituencies in infrastructure—unions, environmental groups, the construction industry itself and so on. These countries strike a balance without losing the various incentive benefits associated with transferring a variety of project risks to the private sector.

It is clear that, while healing credit markets continue to impact infrastructure project development around the world, private equity continues to be strongly interested in the space. Many of the largest financial institutions, public and private-sector pension funds, and private equity firms in the world have raised infrastructure funds and continue to target the space for its attractive medium-risk, medium-return profile. Due largely to a U.S. political and policy stalemate on this issue, however, much of that capital remains on the sidelines or has begun to explore alternative opportunities in Asia, Europe and South America.

A clearer national infrastructure strategy that is not hostile to the deployment of these resources would help improve credit, raise equity financing and speed the pace of transactions.

There’s more that needs to be done. We also must structure programs so that grantees are incentivized to innovate and think beyond the special interests that can dominate the infrastructure debate in the U.S.

An efficiency-based competitive scorecard for projects and for infrastructure quality could create positive incentives for states to emphasize performance.

To coordinate all this activity and direct federal resources, new or overhauled institutions are needed.

A national infrastructure fund administered separately from current programs would help create a large and efficient market for private investors, as well as help depoliticize investment decisions

All these ideas won’t ensure success nor miraculously convert our infrastructure from a 1976 Chevy to a 2010 Ferrari. But at least they’ll increase the likelihood that our national infrastructure will once again be a competitive advantage and a source of pride.

Benjamin Cheatham is a partner in consultant McKinsey & Co.’s Philadelphia office and leads the Americas Infrastructure Practice. Prior to joining McKinsey, he owned and operated a construction company in New York City. He can be reached at benjamin_cheatham@mckinsey .com or at 215-594-4217.

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Information Management > Project Management Challenge or Opportunity?

Contractors and construction professionals are increasingly realizing that their success depends on their organization’s ability to process, manage, filter, keep and leverage information.  We live in the age of information and therefore, we understand that our ability to sort through the barrage of data that surrounds us is critical.  We need to extract meaningful information from the cloud of data which surrounds us, and then use that information to achieve business advantage.  In speaking and interacting with contractors, builders, investors and industry professionals, I have found a common source of frustration that begs a very important question: How do we manage information to become better at what we do?  We cannot make sound decisions without good and timely information.  The management of information is a key driver for success in construction.  It impacts the following:

  • Estimating
  • Purchasing
  • Staffing
  • Contract management
  • Scope Management
  • Planning
  • Logistics
  • Financial Record Keeping
  • Legal and Insurance Documentation
  • Accounting and Tax Reporting
  • Sourcing
  • Materials Management
  • Scheduling
  • Quality Assurance
  • Project Closeout
  • Tracking of Lessons Learned
  • Sustainable Profitability
  • Long-term Survival

I am focused on raising industry awareness regarding information management, and ensuring that we remain sensitive to the manner in which we process, and filter information within project teams (and across project platforms).  There are significant opportunities that stem from information asymmetry in the industry.  The key is to change our mind set and recognize the fact that we are purveyors and consumers of information.

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Sustainability

Sustainability is more than just delivering efficient buildings and infrastructure.   It is a mindset and a commitment to develop projects that minimize the impact on our environment.  A large part of this relates to a systemic approach to building standards which have been established by USGBC (via the LEED ® certification program).  But it involves more than that.  Owners, developers, and public institutions are increasingly demanding evidence that green-building techniques are translating into reduced operating costs along with a reduced carbon footprint.  

The following video captures relevant concerns about sustainable development in developing countries.  It offers a high-level view on sustainability from a leading authority, Mr. Jeffrey Saachs, PhD (of Columbia University’s Earth Institute).

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Building Great Project Teams 101 > The Learning Organization

There is a marked difference between good project teams and great project teams.  The ability to tap into that “thing” that  drives people towards innovation and self-motivation is what separates project leadership from project management.  To really inspire greatness, leaders have to connect with their people and demonstrate that they care about them.

Let’s think about what it takes to build great project teams.  It’s a lot more than hiring good, smart, dedicated people.  It’s about motivating people and teams to become self-actualizing entities that grow and evolve beyond the point suggested by their talent level.  Greatness in project teams emerges when the sum becomes greater than the sum of its parts.

Todays project leaders have to understand that teams are faced with:

– incredible pressure to produce.
– increasing complexity stemming from changing technologies and steeper learning curves. 
– stiff resource constraints.
– a changing competitive landscape.

The only path that will be sustainable is to create an environment which promotes organizational learning.  I highly recommend the following book which changed the way I thought about team building and raised my awareness of the immense potential that remains untapped in our people and in our teams – 

The Fifth Discipline: The Art and Practice of the Learning Organization is a book by Peter Senge (a senior lecturer at MIT) focusing on group problem solving using the systems thinking method in order to convert companies into learning organizations. The five disciplines represent approaches (theories and methods) for developing three core learning capabilities: fostering aspiration, developing reflective conversation, and understanding complexity.

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The Importance of Gate Reviews in Design and Pre-Construction

Gate reviews are essential to well-managed planning and pre-construction phases of a construction project.  The concept is simple in its execution and elegant in its simplicity.  I caution industry professionals that simplicity does not mean that they should let their guard down.  Often the root of project failure lies in a planning process that lacked discipline and formality.  We all know that real world economics impose severe pressure on project teams compelling fast track planning, frenetic schematic design and rushed design development.  As project leaders, we must not fall prey to the kind of groupthink which rationalizes hasty design decisions.

To avoid the instant gratification of moving projects along rapidly from conceptual design – to schematic design – to design development – to construction documents, we implement phase gate reviews (or phase approvals).  These reviews ensure that the team has rationally confirmed that the current phase has been completed, and that the project is ready to move on to the next phase.  A well-run gate review answers important questions and ensures that key issues are raised and properly reviewed.  Some questions that should be raised and answered during a gate review include:

  • Are all of the Owner’s requirements reflected in the current design documents?  If some are missing, they should be included or formally omitted by the Owner.
  • Is the business case for the project still intact? 
  • Does the project leader believe that the existing phase has been completed?  Is there buy-in from the project sponsor?
  • Have the planned schedule and budget been updated to reflect the information included in the completed phase?  Are these in keeping with the Owner’s expectations?  
  • Have potential risks been identified to reflect the current phase?  
  • Have known project issues been validated?
  • Have constructability issues been addressed?
  • Has the design team validated resource availability and materials selection?
  • Is the team controlling the scope or has the scope become a moving target?

Here is a list of gate reviews on construction projects:

  • Project Approval
  • Conceptual Design Approval
  • Schematic Design Approval
  • Design Development Approval
  • Construction Document Approval

The purpose of a gate review is not to cast blame or to generate unnecessary paperwork.  The intent is to subject the project to strict scrutiny by the team that will be charged to deliver the project per the requirements in an economical manner.  Remember the old but timeless adage, “measure twice, and cut once.”

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Contracts Negotiation

The best lesson I learned about negotiation was a simple one.   Contracts negotiation involves a lot of work.  It is all about the willingness and ability of the team to prepare, document, analyze and demonstrate its case.  It is not glamorous and it is often time-consuming.  But if you do your homework, it can be rewarding and satisfying.

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Aligning Information Technology and Business Processes on Projects

The following is from a paper written by Jerry N. Luftman – “Alignment in the Sand”

Project success requires alignment between information technology and business processes. The 12 factors involved in aligning technology and business are:

– Business scope

– Distinctive competencies

– Business governance

– Administrative structure

– Organizational processes

– Organizational skills

– Technical scope

– Systematic competencies

– I.T. governance / How responsibility and authority for I.T. are shared.

– I.T. architecture

– I.T. processes

– I.T. skills

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Manage Large Project Teams Like Small Project Teams

From Michael A. Cusamano’s “How to Make Large Teams Work Like Small Teams”

– Simplify the schedule and work out the interdependencies.

– Stabilize the design via frequent synchronization.

– Use iteration and concurrent engineering.  Projects should iterate and concurrently manage design, build and test cycles, while they move forward completing a project.

– Break up large complex tasks into small manageable activities.

– Focus on creativity by letting people experiment within known boundaries.   Encourage risk-taking.

– Do everything in parallel with frequent synchronizations.  This requires lots of informal communication and trust within the team.

– Teams evolve.  Leaders need to spark and facilitate this evolution and let teams blossom.

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Common Problems on Large and Complex Projects

 

Common Problems on Large and Complex Projects


1.         Difficult and belligerent subcontractors.

2.         Poorly structured subcontracts and loosely defined scopes of work.

3.         Protracted punch list activities, especially those related to the technical interfaces.

4.         Weak subcontractor field project management.

5.         Subcontractor focus on change orders.

6.         Significant materials and installation QA problems.

7.         Lack of adequate dispute resolutions processes.

8.         Materials management and inventory management issues.

9.         Inadequate testing criteria.

10.       Inadequate Owner acceptance criteria.

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The Potential Impact of Changes on Projects

Changes affect much more than cost and schedule. Here is a short list of project areas that can be affected by changes –

–                Cost

–                Schedule

–                Quality

–                Performance

–                Scope

–                Risk

–                Commissioning

–                Marketing

–                Configuration

–                Overtime

–                Supervision

–                Stand-by Labor

–                Utilities

–                Disruption in workflow

–                Inefficiencies

–                Noise

–                Double-handling

–                Documentation

–                Warranties

–                 Life-cycle costs / Maintenance costs

–                Uncertainty

–                Staffing

–                The list goes on…

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