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JR COMPANY’S TOP TEN THINGS
THAT CAN GO WRONG
ON A CONSTRUCTION PROJECT
By Michael DiMercurio
NUMBER 10: EQUIPMENT FAILURE AND FORCE MAJEURE
EQUIPMENT FAILURE: On a complex chemical process plant construction project, the project team had been heavily incentivized to contain costs, to the point that at the 98% complete point, project management team members were mentally counting their $50,000 bonuses to come from the division of the underrun from the project budget.
But during startup, disaster struck. A solid material handling conveyor failed to operate as designed, bringing the entire process to a stop. The vendor was called to respond to the urgent problem, and soon a dozen of the vendor’s tech reps were there in the field. The craft labor was assembled to help disassemble the unit for inspection. Parts were flown in for replacement, test equipment measured vibrations and deflections, and a month later the problem was no closer to being solved than the day it was discovered.
By the time the problems were overcome, the budget’s $5 million underrun was gone and the job was overrunning by several million. All that bonus money, painstakingly earned over a three year project, gone. The project team returned to the home office dispirited and broke.
How do you plan for equipment failure? You can’t. How can you act to prevent it from derailing an otherwise perfect project? This goes to experience with the machinery. Has this breed of machine been built before? And did it work? Be wary of what we call “Serial Number One” problems with untested machinery.
Your equipment should be shaken out by some other poor project team. Let their budget get eaten, let their schedule be late. For your project, let it be tried and true.
To avoid faulty equipment from derailing your project, negotiate the best warranty you can on your equipment, and issue purchase orders in which the retention amounts are large, and no matter what the terms and conditions may say, DO NOT PAY RETAINAGE ON EQUIPMENT UNLESS AND UNTIL THE EQUIPMENT WORKS!
Recently on a different job, an absurdly expensive foreign compressor was installed and the piping that came with the unit had dirt in it that the vendor reps said meant the unit had to be disassembled and cleaned. The specifications for the unit dictated the cleanliness of the unit required, and the vendor had ignored the requirements, costing the job time and money. And of course, the vendor reps were standing around while the craft removed the cooler piping spools for recleaning all got invoiced to the owner. But, the owner’s team was shrewd, and they ignored the purchase order’s requirement to pay the last third of the compressor’s price upon component delivery, instead insisting on waiting until the unit ran without problems.
Despite taking heat from corporate and the vendor, the project team stood firm. The compressor had to function or no one got paid, purchase order terms and conditions be damned. When the backcharges for craft labor and liquidated damages were finally totaled up, the vendor’s retention was completely consumed.
Getting the vendor to pay a six figure backcharge would have been impossible, particularly with a foreign vendor, but holding back the payment made it easy to assess the backcharge. Then the vendor had to come to the project site to beg for his residual money, and when he did, his nose was rubbed in the time and labor damages he’d done to the project. Eventually, the vendor agreed to the backcharge (what else could he do?). So, while the schedule suffered, and the project’s quality was initially impacted, the project’s budget remained intact.
Don’t take the above as any kind of recommendation EVER to default on any contract terms. Contracts and purchase orders should be negotiated to have terms that both sides expect to honor. Consider them wedding vows. But in the above case, the owner insisted that the last payment not be made until the unit ran, and the vendor stood his ground and refused, and the final purchase order would have forced the owner to pay absurdly early. When the owner delayed payment, it brought the world level again. Turnabout, in this case, was fair play.
Contingency: the responsible project manager building a plant on the Gulf Coast or in hurricane paths makes sure that the budget and schedule have sufficient contingency to allow for the unanticipated. But, you say, the project manager may not have the juice to control his budget authorization. That budget is set by someone else. And often, the level of the budget is a hard reality due to project financing, and obtaining additional funding is a major problem. In that case, the PM’s responsibility is to communicate to senior management his honest opinion about his contingency levels. If his budget and schedule (and equipment, bulks and installed quantities) are at risk from storms or acts of God, he should make sure management knows that the project is AT RISK. Other than that, all the PM can do is control the jobsite intelligently.
If a hurricane is barreling toward the coast where the project is being built, the PM should shut down production and channel labor into protecting the project and the laydown areas to the extent that makes sense. Fragile installations like cooling towers may be goners, but certainly stacks of material that could become missile hazards like metal siding panels can be secured so they don’t slice through parts of the project, or God forbid, personnel.
On another recent project under a hurricane threat, management directed the PM to continue working on the fast track emergency project rather than “batten down the hatches” for the coming 160 mile per hour winds. The PM, a ballsy SOB, called his management and flatly told them that he was the project manager and he was making the tactical decision to abandon direct labor efforts and expend his manpower solely to secure installed work and bulk materials and then to evacuate the field hands. While management balked, and the PM was criticized, it was the right decision. The storm hit, no one got hurt, the installation was protected, and when the sun came back out, construction could commence with not one manhour wasted, only a loss of schedule time.
In the face of force majeure, the contractors get more time, but no more money from the owner. The delay they suffer is an excusable delay but NOT a compensable delay. It’s not the owner’s fault that the winds howled. But the owner should not be unreasonable and expect the contractor to make up time on his nickel. If the owner wants to catch up on schedule, he must pay the premium portion of overtime labor.
What if the force majeure is due to a labor strike or slowdown? Recently on a union job, the electricians used a boom truck to lift heavy prefabricated concrete cable trenches, which they claimed as their jurisdiction. The operating engineers took issue, and enacted a “safety stand-down” in which they stood beside their machines in protest – all the while getting paid – refusing to make lifts for the other craft. The electricians would not budge from their borderline unsafe acts of using the flimsy boom truck to lift the utility trenches. What could the project manager do? He got on the phone and rousted corporate labor relations and got the labor relations executive on the next flight north, then got on with old contacts inside and outside the unions and exerted every ounce of pressure he could. He directed all work be continued that could be worked without lifting equipment, so the period of the slowdown wouldn’t be a day-for-day loss, and he planned for the moment when the crews returned to work.
After nine days, an accommodation was reached downtown, and the engines of the cranes again rumbled throughout the jobsite, and the PM implemented the catch-up plan. In his emergency communications to senior management, he demanded and got authorization to proceed to maximum overtime, and drove the site seven days a week. The project made its commercial operations date, and with the additional funding for the overtime (which he forecasted successfully within 10%), the project hit its budget target.
The point – the first string project managers fear no force majeure event, because they have contingency moneys and contingency plans set aside for the “foreseeable worst case scenario.”
FORCE MAJEURE: Hurricanes and tornadoes and nor’easters, oh my! Force majeure, the act of God that can cause project disasters even when everything else is perfect. Can force majeure be planned for or managed? Many say no, but what do the first string project managers do to prevent their projects from suffering from force majeure?
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