Beruflich Dokumente
Kultur Dokumente
Disclaimer
This case was written by K. Lakshmanan, Chittaranjan Sahoo, Chakradhar Iyyunni under the supervision of
Prof. Homayoun Khamooshi and Prof. Sanjay Jain, School of Business, The George Washington University,
Washington, D.C., USA towards partial fulfillment of the requirements of the Level-3 program in Strategic
Project Management conducted by Larsen & Toubro Institute of Project Management (L&T IPM,
http://www.LNTipm.org/), Vadodara, India. The authors do not intend to illustrate either effective or
ineffective handling of managerial situations and the case has been created to facilitate class-room
discussion for practicing project managers in L&T. The authors may have disguised certain names and
other identifying information to protect confidentiality. The data presented shall be treated as
confidential and shall not be used for teaching outside L&T.
Introduction
It is 8 months into the project and the site team is under tremendous pressure
as the early works planned are delayed to a great extent. Entangled with the
stringent QHSE (Quality, Health, Safety and Environment) Policies and
Specifications in the Contract, and, accommodating the local contents as per
the Bumiputera (Son of the Soil) philosophy - a unique concept as per the laws
of the Republic of Malaysia, the project team is unable to cope
with the
Added the woes, of a key subcontractor deployed to carry out certain critical
early activities had abrupt demobilization without any prior notice.
The Project Team reeling under tremendous
Overview
PETRONAS, a Fortune 500 Company, is the biggest national company in Malaysia
with a turnover of more than US$ 51 billion in 2005 and operations in 35
countries. In its pursuit to upgrade the selective by-products from their Melaka
refinery to produce the highest quality Group 3 lube base oil, PETRONAS
decided to expand its existing refinery at Melaka with MG-3 (Melaka Group-3)
project. Being first of its kind of project executed in the region and to get
leadership position in Lube Oil market, timely completion of this project is very
important to PETRONAS. The basic engineering for the plants was carried by
Foster Wheeler,UK
recent past, it has tied up with various international engineering companies for
technology transfer and obtained approval of many renowned licensers. The
PETRONAS MG#3 Project came at the right moment and L&T grabbed the
opportunity with a focused effort.
Though L&T had executed several critical units in oil refineries viz.
catalytic
cracker,
vacuum
distillation,
diesel
fluid
hydro-desulphurization,
hydrocracker etc. it did not have any proven track record of executing a lube
oil plant. Hence it decided to look for partners in order to satisfy stringent prequalification criteria.
After a lot of deliberations with various parties, L&T forged alliance with Lurgi
AG (Germany) and a local construction company named KQKS Sdn Bhd
(Malaysia) on scope and liabilities sharing basis. Lurgi was elected the leader of
the consortium, as they had executed a similar lube base oil plant in Poland.
However L&T had the major stake in monetary terms (approximately 68%) and
was responsible for major engineering (except for the Diesel Hydro-treater &
Motor Spirit Diesel Process Units where the engineering and procurement is in
Lurgis scope), procurement and the entire Construction activities including
project management.
In order to beat the stiff competition from established global EPC players like
Samsung, Technip, Hyundai, Toyo and Daelim, the strategy for formulating a
cost-competitive bid was formulated by the consortium in the early stages.
Satisfied with the capabilities of the consortium partners, the price and overall
project schedule, the job was finally awarded by the client to the consortium
in December 2005 to achieve the PAC (Performance Acceptance Certificate
issued after the Test run of the Plant) within 29 months of the job being
awarded. The approximate order value was US $ 350 Mn with L&Ts share at
about 68%. Majority of construction work was to be executed by L&T with no
prior experience in executing EPC projects in Malaysia. L&T hence had to
depend on Malaysian sub-contractors and vendors for mobilization of resources.
During this period, L&Ts site team had allocated certain temporary
infrastructure work to few local subcontractors referred by various entities
they came across viz. the local JV Partner ( who has a larger interest in
financial management than project execution), The owner, Indian Consulate,
etc. Due to the uncomfortable feeling in managing these subcontractors, the
administrative team was asked to evaluate whether the law of the Republic is
flexible
to
accommodate
more
resources
from
elsewhere(India
in
particular);however, it was not allowed under Bumiputera law. This has put
L&T in a difficult position as there was no other option but to get the work
done through the existing sub-contractor for construction of project site office.
Activity Description
Schedule
Completion /
planned to date
(32nd week)
Actual
Completion/
status
Remarks
L&T had been struggling with the permutation and combinations of the
subcontracted works amongst the existing ones so as to draw a balance but
unfortunately the allocation/assignments did not deliver the desired result.
The starting troubles created misconception in minds of the owner and the PMC
with respect to contractors capabilities in mobilizing the right sub-contractors
for the project. As a result, the sub-contractors proposed by the contractor for
main plant works were rejected by the owner / PMC which further delayed
commencement of major critical activities of the project (under the guise of
subcontracting stipulation spelt out in the Contract Refer Exhibit1). In order
to gain confidence of the owner / PMC and to complete this project within the
contract schedule, L&T realizes that it is important to have a sound subcontracting strategy and processes in place for identification and finalization of
sub-contractors that will enable them to have the best sub-contractors for the
project.
24th Week
16th Week,
12th week.
40%
11%
On-going, 90%
completed
Completed.
24th Week
Completed. 18th
week
Subcontracted to Vendor
A
Subcontracted to Vendor
B
Subcontracted to Vendor
A and then to Vendor C
On-going , 5%
Preparatory work
started
Progress: NIL
7.5%
Status Report
The site team was clueless as to whats wrong with the subcontractors the
rates are reasonable and in some cases even much better than the prevailing
market rates. Also the payments are done in time. It was also not clear if any
action should be taken since a group of L&Ts construction team members state
that this happens in all projects, once the main work starts, the contractors
will fall in line!
dependent on the civil foundations delay in these activities shall have a direct
impact on the critical path and may lead to crashing on a later date.
Piling Scope
After SI (Site Investigation), commenced during 8th week and completed by
12th week, piling was next important field activity to be taken up. Piling work
has to be executed in three packages as given below:
Process units 18, 19 ,31 and adjoining off-site pipe-rack and sleepers
Piling in unit 75 and pipe rack and sleeper in that area
LSWR
With the frontage available in terms of Engineering and clear site, L&T
awarded a part of the civil works to sub-contractor- Dafter going through the
documents produced by him. The subject work being part of the Main Plant was
important and the owner/ consortium partners and PMC had great hopes that
with its sound track record in India, L&T will catch up with the schedule on this
part of the project. The site team was excited and put in hard work, but one
fine morning, the subcontractor demobilized all his resources overnight,
without any prior notice. The site team was absolutely puzzled and quite
apprehensive of the customers reaction. In any case, this news was
communicated to all the stakeholders.
The civil supervisor, the focal point to deliver the field activities appears to be
lost in the woods, unable to understand as how to proceed, says It is difficult
to work here we have to find a way out to get people from other countries as
these subcontractors are not trustworthy, neither I can rely on them. Should
we try out by direct recruit of workmen and buy new construction equipment?
The Project Cost Controller jumps on to argue We do not have such provision;
It shall be too costly and not viable. It will be a huge problem as we are likely
to reinvent the wheel! We have not planned facilities for such a huge
workforce (to build on our own) and if we start now, the temporary facilities
will take at least 8 to 10 months down the line And, who shall construct these
facilities, the same old subcontractors?
One of the owners superintendent points out It does not look like that this
subcontractor can execute this job, they may be great guns in their soil, but
cannot become an International / Global EPC player.
There have been few meetings on motivating the subcontractor, with offers
such as an incentive scheme for timely completion, award on safety
compliances etc. The Project team had been trying different ways to retain the
subcontractor including higher rates than prevailing market rate and making
the billing schedule more attractive. In a few cases, mobilization advances
were paid to sub-contractors by going beyond accepted practice. In spite of all
such motivating factors, the subcontractors were miserably failing. One of the
L&T supervisors commented that it looks like that the subcontractors had taken
L&T for granted since it was totally dependent on them.
L&T had executed a project in northern part of Malaysia ~4 years back, there
was no history of any delayed payment. The Sub-contractors in Melaka refinery
were not aware of L&T or its track record on payment.
Typically, in Indian context, L&T deploys subcontractors who have been
working with them for more than 10 years and as such there is no laid down
Sub-contracting procedure for carrying out regular construction works viz.
earth work, concrete works, steelworks fabrication and installation etc. due to
repetitive nature of the works in almost all Projects across India. L&T usually
adopts a rate analysis concept for various works and prequalification criteria
are not in practice as capability and capacity of the subcontractors are known.
The number of subcontractors for various activities is decided on the basis of
their spare capacity to mobilize needed resources.
Case Problem
The project manager is concerned that something has to be done in so as to
eliminate the backlog and streamline the progress in the future. He is aware
that if corrective and preventive actions are not taken now, the project failure
in terms of schedule (and therefore cost) is inevitable. From previous
experience , he understands that certain amount of slippage do occur during
the initial phase to overcome the learning curve depending on uniqueness of
Projects and such slippages are possible to catch up during the peak periods.
However, the current scenario raises an alarming signal due to continued
attrition of resources / focus of the sub-contractors who are not aligned with
the project schedule. To summarize, the project manager realized that
something has to be done in order to address the existing contract/ subcontract management and also to have a long term strategy for the future.
In the upcoming monthly review meeting the project manager has to present
the progress and come out with an achievable catch-up plan. It is a crucial
meeting and everyone is aware that plan should be demonstrable as practical.
The works are spread over many areas consisting of process units, utilities,
offsite, associated facilities and ancillary systems for the production of MG-3.
These elements in the Plant lay-out are divided in following areas:
1. Green field area Hassle free from hydrocarbon / operating area
2. Brown field area- Works involved adjacent to live hydrocarbon operating
process area
3. Shutdown and tie-in works Works involved in running plants
It is understood that the action plan has to be portrayed as manageable,
demonstrable and measurable. Unless a concrete actionable plan is laid out, it
will be very difficult to convince all the stakeholders to support the plan. The
stereotypical presentation of previous review meetings may invite huge
criticism and the owner may invoke draconian measure. To induce confidence
amongst all, the project manager was brain storming (what has gone wrong,
what is going wrong, how to rectify the situation etc.) with his blueribbon
team leaders to prepare the presentation and get ready with the answers for
the likely scathing attack with questions such as those given below.
What should be the short term strategy to manage the ongoing works, do
we have to offload some works from the existing subcontractor engage
additional contractors?
What are the checks, balances and measures for subcontractor
management on a long term basis should we follow our proven process
of Indian context ?
How do you assure the other subcontractors will not run away?
From where and how will you get capable contractors adhering to the
contractual stipulations?
Exhibit-1
Article: 21 Sub Contracting
21.1
21.2
21.3
21.4
21.5
20.2
20.3
20.4
20.5
20.6
20.7
20.8
28.3
CONTRACTOR shall source the goods and services and shall appoint
SUBCONTRACTORS for the supply of goods and services in the following
order of priority. In addition, in each of the categories below, the
companies based or operating in the state of Melaka shall be given
priority over the other companies.
a) Bumiputera owned companies and Bumiputera controlled public listed
companies and
b) Malaysian owned companies
28.4
28.5
28.6
28.7
For all air transportation, Malaysian Airlines (MAS) shall be used for
routes served by MAS and for flights where MAS services are not
available, booking of tickets shall be made through MAS offices
End of Article 28
MALAYSIAN PARTICIPATION
in
the
PETRONAS
Vendor
REFERENCES
1. Morris, Peter W. G. & Pinto, Jeffrey K., The Wiley Guide to project program
& portfolio management, John Wiley & Sons Inc., New Jersey, 2007.
2. Morris, Peter W. G. & Pinto, Jeffrey K., The Wiley guide to project:
Technology, supply chain and procurement management, John Wiley & Sons
Inc., New Jersey, 2007.
3. Morris, Peter W. G. & Pinto, Jeffrey K., The Wiley guide to project
organization & project management competencies, John Wiley & Sons Inc.,
New Jersey, 2007.
4. Morris, Peter W. G. & Pinto, Jeffrey K., The Wiley guide to project control,
John Wiley & Sons Inc., New Jersey, 2007.
5. Richardson, Gary L, Project management: Theory and Practices, CRC Press-