TECHNICAL A RTICLE
billion international airport was close to
Why Cost and Schedule Overruns
on Mega Oil Sands Projects?
Dr. Janaka Ruwanpura and Dr. George Jergeas, P.Eng
ABSTRACT: Developing and constructing oil sands mega projects are huge technological, engi-
neering, and construction achievements for Alberta and Canada. Thousands of engineering
and project management professionals and workers are contributing to the current effort with
great pride and sense of satisfaction. But recent large capital oil sands construction projects have
all experienced significant cost and schedule overruns. There are a number of reasons for these
overruns. This article provides a definition of a “mega project”, illustrates the challenges in de-
livering oil sands mega projects, and lists a number of reasons for cost and schedule overruns
KEY WORDS: Cost overrun, mega projects, oil sands, and schedule overruns
T
he Alberta oil sands, which
represent one of the world’s largest
hydrocarbon deposits, are found in
three regions in northern Alberta, Canada.
These are the Athabasca sands that
surround the town of Fort McMurray, the
Peace River sands to the west, and the Cold
Lake sands to the southeast.
According to Alberta government
statistics, 1.6 trillion barrels of oil are locked
in the sandy bitumen under the forest and
muskeg. Of that, 175 billion barrels are
proven reserves that can be recovered using
current technology. Current production in
Alberta exceeds 1 million barrels per day. It
is projected that production will triple to 3
million barrels a day by 2015 [3].
Currently, oil can be extracted from the
sands using two commercial methods: strip
mining and in situ mining.
Alberta oil sands development projects
are mega engineering and construction
undertakings. Each ranges between $8-10
billion in capital investment. Each
employs thousands of workers, engineers,
suppliers, contractors, and support staff.
These oil sands developments are
facing many challenges including those
associated with environmental impacts,
water requirements and supply, labor
availability and construction productivity,
energy requirements, infrastructure
constraints and market conditions. It is not
uncommon for these projects to experience
cost overruns of up to 100 percent of the
original cost estimates, and limited
schedule overruns.
A study conducted for the government
of Alberta, Canada found that cost and
schedule overruns on large oil and gas
construction projects were the result of
24 Cost Engineering Vol. 52/No. 1 JANUARY 2010
PEER REVIEWED
200 percent.
Flyvbjerg also quotes and supports
studies regarding the calamitous history of
previous cost overruns of very large projects.
The assertion is that too many projects are
completed that should not have been done.
He questioned and criticized the credibility
of front-end analyses that are routinely
carried out as part of mega project
preparation work. These typically include
cost-benefit analyses, financial analyses, and
environmental and social impact
statements He adds that, “mega project
development is currently a field where little
can be trusted not even—some would say
especially not—numbers produced by
analysts”.
More and more mega projects are built
many factors [10]. Included are the
despite the poor performance record of
apparent “management” deficiency in
many projects. According to Flyvbjerg, the
managing scope, time, quality, cost,
main causes of the mega project overrun
productivity, tools, scaffold, equipment,
are the inadequate deliberation about risk
materials and lack of leadership. While
and a lack of accountability in the project
these projects are normally successful from
decision making process.
an engineering, operational and safety
Specifically he lists the following:
standpoint, the cost and schedule overruns
are a cause for concern and the reason for
• Lack of realism in initial cost estimates.
this research work.
• The length and cost of delays are
underestimated.
Cost Overrun: Literature Search
• Contingencies are set too low.
There is no single cause for cost and
• Changes in project specifications and
schedule overruns on construction and
designs are not sufficiently taken into
engineering projects. The Construction
account.
Industry Institute (CII) has identified many
• Changes in exchange rates between
reasons for cost overruns, including but not
currencies are underestimated or
limited to the following.
ignored.
• Underestimation of the geological risk.
• front-end planning;
• Quantity and price changes are
• design;
undervalued. And,
• procurement;
• Undervalued expropriation costs and
• start-up and operations;
safety and environmental demands.
• human resources issues;
• Underestimation of technological
• organization
innovation with high risk. This is
• project processes, and
mainly because of the unproven nature
• project control [1].
of new ideas.
According to Bent Flyvbjerg, many
Cost overruns continue to be a major
infrastructure mega projects have strikingly
challenge facing governments and
poor performance records in terms of
organizations in the infrastructure and
economy, environment and public support
mega projects environment. The latest
[5]. He cited many examples of
examples are the new Wembley Stadium
infrastructure mega projects that
and the London Olympic Games in 2012.
experienced major cost overruns, such as
The new Wembley Stadium, which was
the channel tunnel and the Denver
opened in March 2007, became the
international airport. The channel tunnel,
costliest arena ever built at US $1.54
which was opened in 1994 at a construction
billion. The bill for the London Olympic
cost of £4.7 billion, overrun by 80 percent,
Games rose from £2.3 billion to £9.35
while the cost overrun for Denver’s US $5
billion in less than two years, since the City
of London won the bid to stage the games different activities per day, will result in additional premium and loss of
[7]. 100,000 individual jobs during a 10 day productivity costs.
shift. • Craft wage increases to attract to the
Research Method Each job requires a combination of the location personnel that possess the
The results and findings outlined in the correct materials, location, access, tools, local governmental requirements to
following sub-sections are part of a larger equipment, scaffold, safety, quality, rigging, work in the region. (Craft licensing and
research work, which will be reported on at consumables, welding, x-ray and many language requirements/limitations
a future date. The author surveyed and other inputs to allow the worker to get his or result in a smaller qualified work
incorporated the opinion of 90 her job done. force.)
international senior project managers. This task belongs to management, • Regional and national demands on
These were from both owner and which to date has not been able to plan, labor, including demands from other
engineering procurement and construction organize, or execute in a manner that has mega projects, which restricts the
(EPC) organizations. The purpose of the resulted in lower than anticipated labor availability of craft labor.
survey was to verify the findings of this productivity. If labor is not carefully • Under estimation of the labor
study. These 90 project managers came managed, budgets double. And this has productivity loss, associated with
from Canada, the US, Norway, UK, historically occurred. working in cold weather climates, and
Germany, Australia, India, and Finland. Job sites, past and present, on mega locations with severely shorter daylight
projects have been characterized by hours in northern regions. (Weather
Defining Mega Projects confusion, insufficient use of tools, conditions such as low temperatures,
Participants of this research agree that equipment, material and labor, work high winds, precipitation, and reduced
mega projects can be defined as being over instructions are vague, and engineering is daylight hours, can significantly reduce
$1 billion in total installed cost, excluding not prioritized. The result has been no labor efficiency.)
development costs (expended prior to the predictability of costs and schedules [11]. • Shortages of skilled labor and lower
project being formally approved). Mega There are many aspects in each mega than anticipated labor productivity
projects are huge in magnitude and are project that must be done and completed because of mismanagement of the
characterized by significant number of properly, if the overall results are going to be construction phase.
interfaces, interdependencies, complexity successful. The engineering and • High labor turnover mainly resulting
and risks. Some of these must be managed construction efforts illustrated above, show from the harsh working environment
at a level above the project team. the complexity and huge magnitude of the and competition between employers
Designing and constructing a $3 scope. This requires a huge level of project trying to attract the best labor. This
billion mega oil sands project for example, management effort to achieve success. instability on mega projects can be
may involve the following. further aggravated by senior
Research Findings management changes on the owner’s
Engineering Effort This investigation revealed the side.
• 3.5 million work hours at a cost of following reasons for cost and schedule • Transportation costs (including custom
$100/hr. overruns. cost) are generally underestimated for
• 40-50,000 design drawings. And, permanent materials, construction
• 10-20,000 vendor and shop drawings. •. Unrealistic or overly optimistic original equipment, personal, staff, etc.
(AFE) cost estimate and schedules. • Environmental and regulatory
Construction Effort The underestimation of project costs compliance costs are not given
• Construction hours or field labor, may be explained by many reasons, sufficient consideration during the
approximately 5000 work hours per including the following. contract negotiation period, by both
million dollars of capital (i.e. 10-15 the client and engineering firms.
million worker hours at $85 to $100 per • The under appreciation of project Projects often are not “grandfathered”
hour). complexity, interfaces, with respect to governmental
• Labor force of 10,000 workers, with a interdependencies, and risks associated regulations, which can change with
turnover of 30,000 people. with the mega project environment. local political and environmental
• Supported by 500-800 staff personnel. Some of the risks are outside the specialty group pressure.
And, control of the project management - Material cost for both permanent
• Organize order, store, and retrieve team. facilities and temporary facilities are
80,000,000 material items. • Under estimating the cost to attract and not sufficiently escalated during the
maintain the labor (craft) work force project budget development phase.
Constructing a $3 billion mega project (including camp development and These escalation cost are often
in Fort McMurray may require at peak operations cost. Also, costs to transport qualified or limited by the EPC
defining and scheduling work for 10,000 personnel into and out of the remote contractor, or passed along to the
people every day, with a personnel turnover regions where the mega projects tend client. (i.e. Craft labor escalated 20 to
that can reach 300 percent annually. to be located. 30 percent in 2006, and the norm is
Managing a craft mix of 10,000 workers, • Underestimating the direct and closer to 3 to 4 percent per year. Nickel
who work in pairs doing at least two indirect costs of overtime, including used in SS increased over 100 percent

Cost Engineering Vol. 52/No. 1 JANUARY 2010 25

 in cost in the past year, whereas normal
material escalation is estimated at 2 ½
to 4 percent per year.)
- Requirements for local content can
add inefficiency and additional •
training cost to staff a project. These
requirements can also eliminate lower
cost vendors and fabrication facilities •
in order to meet the “local content”
requirements.
Incomplete Scope Definition or
Inadequate Front End Loading
Incomplete scope definition and
inadequate front end loading are mainly
because of the fast-tracking nature of mega
projects. Also, ongoing changing customer
requirements result in scope changes
throughout the life cycle of the project. A
lack of understanding of the cumulative
impact of scope changes on project cost and
schedule add another dimension to this
issue.
The client’s and engineering firms’
practice of pushing work to the field early,
puts construction under an unrealistic
compressed schedule with increased
overtime requirements and often with little
or no cost consideration for the field cost.
Engineering firms and clients have
typically used the approach that it is
cheaper to force schedule compression on
the construction work, based on
construction labor being less expensive
than engineering cost. However, the all-in-
craft labor cost, including camp cost, is
currently in the $120 to $180 per hour
range, which far outweighs the minimal
cost to work engineering overtime to
maintain or recover the design deliverable
schedule.
Inappropriate Project Strategies for the
Mega Oil Sands Environment
Some project strategies deployed, do
not properly consider the level of scope
definition, the fast track nature of the mega
project environment, market condition,
owner participation, owner control and
owner risk. Improper or late consideration
of the following project strategies adds to
cost overruns [4].
• Project management strategies such as
risk management, project control,
change control, communications,
organization and responsibilities.
• Contract strategies relating to
management, design, construction and
26 Cost Engineering Vol. 52/No. 1 JANUARY 2010
commissioning services. These to adversarial relationships and
strategies are driven by time rather than protracted disputes.
cost, assuming safety and quality are • Poor site organization and layout
given requirements. leading to excessive time wastage and
Design strategies such as contributions productivity loss during construction.
from client business, operation, project • Joint venture (JV) of project partners,
team, contractors and suppliers. contractors and engineering firms that
Procurement strategies including are not aligned or not set up to work
preferred suppliers, progressing, effectively due to different cultures,
inspection and expediting, receipt, internal JV conflicts and diverging
storage and management, spares and visions of the way that the EPC project
documentation. should structured and managed.
• Construction strategies, including site
management and organization, site Recommendations
layout, power, utilities and drainage, Mega projects are challenging, complex
work breakdown structure, and risky with a large number of interfaces
construction method, off-site and interdependencies. Fast tracking in
prefabrication and assembly, schedule combination with scope changes at the
and milestones, industrial relations, front end stages needs to be anticipated,
and pre-commissioning. monitored and controlled by project teams.
• Commissioning strategies including Owners must implement processes that
responsibilities, schedule and detect and curb systematic cost
integration with construction, underestimation, scope changes, and
resources, training and validation, schedule deviations, as early as possible and
engineering and trade support, and take necessary and timely actions. ◆
provision of operating materials.
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Phase Work Packaging for Project Control,
Mismanagement of the construction SD-28, University of Texas at Austin,
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2. Creswell, J. Qualitative Inquiry and
• Later than anticipated engineering, Research Design: Choosing Among
vendor data, equipment and material Five Traditions. Thousand Oaks, CA:
deliveries. Sage, 1998.
• Poor project controls. Nobody on the 3. Dunbar, R., M. Strogran, and P. Chan.
project has single point responsibility Potential Supply and Costs of Crude
except the client who does not control Bitumen and Synthetic Oil in Canada
much of the work. 2003-2017, Canadian Energy Research
• Inadequate plan of execution and Institute (CERI), Study No. 108,
poorly defined tasks and division of March 2004.
responsibility. 4. European Construction Institute
• Lack of knowledgeable leadership in (ECI). The Fast Track Manual: A
the engineering, procurement, Guide to Schedule Reduction for
construction and start-up of Clients and Contractors on
mega/major facilities. Engineering and Construction
• Inexperienced or poorly equipped Projects, ECI, Loughborough, UK,
project management personnel and 2002.
supervisors, coupled with the inability 5. Flyvbjerg, B., N. Bruzelius, and W.
to understand, plan, adapt, implement Rothengatter. Megaprojects and Risk:
project management procedures or An Anatomy of Ambition, Cambridge
systems. University Press, UK, 2003.
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purpose including inadequate use of Team Trust, MSc thesis, University of
shop fabrication, modularization Calgary, Calgary, Alberta, Canada,
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• Poor communication, team work and 7. Hughes, R. An Outcry in Britain on
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8. Lavingia, N. Best Practices in Cost
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AACE International Annual Meeting,
Washington, US, 2004.
9. Lavingia, N. How to Create a World
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ABOUT THE AUTHORS

Dr. Janaka Ruwanpura and Dr. George
F. Jergeas , P.Eng., are with the Department
of Civil Engineering, University of Calgary,
2500 University Drive NW, Calgary, AB,
T2N 1N4, Canada. They can be reached
by sending e-mail to: janaka@ucalgary.ca
and to: gjergeas@hotmail.com.

McDonough Bolyard Peck receives an

CMAA 2009 National Project Achievement Award
Danelle Prezioso, MBP Director of Communications & Marketing

M
cDonough Bolyard Peck, Inc. (MBP) has been se-
lected by the Construction Management Associa-
tion of America (CMAA) for an Honorable
Mention in the 2009 National Project Achievement Awards in
the category of Infrastructure Project with a constructed value
less than $150 million for the I-64 Battlefield Interchange Re-
construction Project in Hampton Roads, Virginia. This is
MBP’s second consecutive Project Achievement Award recog-
nition.
This I-64/Battlefield Boulevard Interchange Project con-
sisted of the first braided collector-distributor lanes in the Hamp-
ton Roads area. This phased construction project included 5.88
lane miles of paving with the expansion of Interstate 64 from six
lanes to fourteen lanes, four new interstate bridges, and phased
demolition and replacement of the existing Battlefield Boule-
vard Bridge over Interstate 64.
The national Project Achievement Awards program recog-
nizes excellence in construction and program management.
More than 150 project entries were received and reviewed by a
panel of more than 20 judges. The award was presented to MBP
at CMAA's National Conference on October 27, 2009 in Or-
lando, Florida.
“We are extremely honored to have been chosen for this
award,” states Charles E. Bolyard, Jr., PSP, CFCC, MBP's
Chairman and CEO. Mr. Bolyard is a member of AACE Inter-
national. “The I-64 Battlefield Boulevard Reconstruction project
visibly manifests MBP’s core values of teamwork, quality and
hard work.”
The I-64/Battlefield Boulevard Interchange Project was also
profiled in the cover story for the June 2009 issue of Public
Works Magazine and has achieved other honors such as 9th Best
Road of 2009 by Roads & Bridges Magazine and communica-
tions awards including the Pinnacle Award, Hermes Platinum
Award, and Communicator Award of Distinction. ◆

Cost Engineering Vol. 52/No. 1 JANUARY 2010 27