Analysing project management costs
Research into project management costs in the oil and gas sector
As a historical rule of thumb, operators’ project management costs typically represent 8-16 percent of total capex spend in the oil and gas industry. However, research recently undertaken by The Performance Forum, a joint industry project that provides cost analysis to member companies, has found projects where this figure has risen as high as 26 percent in recent years – more than materials as a percentage of capital expenditure.
Size doesn’t matter
The surprise was in the size of projects where management costs were high. “Some of our members assumed that as a project got bigger, the project management costs would reduce as operators found economies of scale or repeated activities,” says Aileen Jamieson, Global Director of The Performance Forum. “Others expected to see a straight line across all projects.”
Contrary to these expectations, the predictor of high project management costs does not always seem to be the size of the project. Project management costs (as a percentage of overall costs) are lowest for developments valued at US$500-2,000 million. This is the most typical size of project in the industry, meaning that operators have accumulated more in-house expertise and require less bespoke assistance.
However, as the graph (right) shows, the research found higher management costs for projects that were both larger and smaller than this band.
Drivers of project management costs
If project value can’t be used as an indicator of project management cost, where should operators look to help them estimate project management costs? In analysing members’ data, The Performance Forum found a number of other factors that drive up these costs, including:
- Ownership – Multiple partnerships will increase the negotiation needed, particularly if the operator has only a small stake in the venture.
- Experience – Do you have experience of exploration and production in this country? Does anyone?
- Field location – How developed is the region in terms of infrastructure and existing developments?
- Operating environment – What conditions will you face?
- Water depth – How deep are you building your offshore facilities?
- Technology/innovation – Are you using or enhancing current technology or systems?
- Complexity – How many different facilities are there?
- Levels of supervision – How experienced are the major teams?
- Track record – How experienced is your project management team?
- Contracting strategy – Have you used this strategy before?
- Project schedule – Are you trying to fast-track this project?
- Do you have an integrated schedule for multiple facilities?
To help operators estimate project management costs, a scoring system has been developed that helps members consider and weigh these factors, enabling them to manage risk more accurately.
Lessons for other sectors
While this approach has been developed by a joint industry group in the oil and gas sector, Aileen notes that many of the insights apply much more widely. “The key issues are innovation and complexity,” she says. “High project costs are associated with industry ‘firsts’, which are difficult to benchmark in terms of project schedule. In fact, many of them will end up being fast-tracked at some point through their execution. Also, major projects often consist of many sub-projects, managed by separate project managers – with distinct schedules and budgets of their own. Multiple sub-projects with non-integrated schedules will always result in higher project management costs. Fully assessing the risk beforehand is much more likely to improve the quality of outcomes and the overall success of any project.”