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The Fiscal Case for ORAT

20 April 2021 14:52:26 EDT / by N. Ortez Gude

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This is the second in a series of posts aimed at creating a broad understanding and awareness of ORAT. It is intended to be a prerequisite for more in-depth training that will be available soon.

 

In the last post, I wrote about Deloitte’s estimated 30% early-stage cost-savings predicted for projects that are developed using the ORAT framework. When I discuss that level of savings with owners of billion-dollar-plus projects, you can bet it gets their attention – along with a healthy dose of skepticism.

Most experienced airport executives are acutely aware of and anticipate cost overruns during the construction phase of major projects. That’s evident from the substantial contingency funds that are included in project budgets. Still, it’s hard for many to imagine they stand to have that much value destroyed.

My goal with this segment of the series is to present more of the ‘why’ behind Deloitte’s conclusion. Toward that end, it’s helpful to think of cost in terms of value destruction. That’s because capital projects are investments that have been justified based on a business case. As such, the goal is to maximize the return on that investment. Anything that diminishes the return, be it additional cost or lower revenue, destroys the value and is unacceptable.

In that regard, the four areas with greatest risk of value-destruction are construction delivery, ramp-up, operational performance, and long-term O&M costs. ORAT can dramatically reduce these risks and improve project performance across all dimensions.

 

Unreadiness Carries a Cost

Opening day can be considered a definitive test of the effectiveness of operational readiness. Most define success as a seamless experience for stakeholders, passengers, and guests alike. If everything goes as planned, opening-day is just like any other day.

Operational failures, on the other hand, can be spectacular and costly, both monetarily and reputationally. A 2020 study by Al-Mazrouie, et al[1] presented the estimated cost impacts of well-known opening-day failures, ones they termed “disastrous openings” over the past three decades. A few of the examples they offer are:

  • Denver Airport, (Denver, CO): $5 billion in 1995
  • Chek Lap Kok, (Hong Kong): $20 billion in 1998
  • Heathrow-Terminal 5 (London): $6.4 billion in 2008

In one of the most recent cases, beyond false-starts and billions in cost overruns, executives and staffers who worked on the new Berlin Brandenburg International Airport have suffered serious reputational and career damage.

But failures don’t just happen in construction delivery and they don’t have to be spectacular to be expensive. The cumulative effect of poor choices, schedule delays, systems issues, poor staff preparedness, and lack of stakeholder engagement can quickly drive-up costs even if opening-day ultimately goes off smoothly.

The ORAT framework was created so that project owners (and stakeholders) have an end-to-end structured approach to operational readiness that includes accountability for, and visibility into projects’ progress toward operational readiness. As a result, the process becomes a seamless continuum rather than a series of distinct, disjointed and ill-timed tasks.

It’s a critical change in perspective that helps surface problems and identify savings much earlier in the process. In fact, at Citiri, we strongly believe in the concept of continuous operational readiness across the entire asset lifecycle including disposition.

 

Sub-Optimal Operations Carries a Cost

While the traditional view of operational readiness speaks to the lead-up to opening day, including construction delivery, I think most industry professionals would agree the impacts of operational readiness, or the lack thereof, extend well into operations. Ramp-up (typically the first year of post-commissioning operations), and lifecycle costs are significantly influenced by the effectiveness of an owner’s operational readiness program. With up to 95% of lifecycle costs having been committed by the start of operations, it’s also easy to see why early-start/accelerated operational readiness is so important.

A poorly developed CONOPS (or misalignment with a good one), inadequate stakeholder engagement, insufficient staff training, and ineffective planning cause long-term value leakage in each year of operations. An Emerson whitepaper[2] estimates this annual value leakage to be up to 2% of lifecycle operating costs.

Here again, ORAT is helpful in that it allows project owners and stakeholders a better opportunity to spot flaws and uncover issues early in the process, when delays and cost escalations can be avoided or at the least mitigated. By aligning with and helping keep construction projects on schedule, it also ensures that there is adequate time for proper testing and trials which can reveal potential go-live and operational issues that may be harder to address once operations have commenced.

 

Time (and Timing) are Money

The most expensive issues typically arise from problems during construction and ramp-up, but they usually don’t end there. We’ve talked about how operational performance issues can leak value over time and the same is true for O&M. Higher costs can be built in, literally, from the start.

According to Emerson: “Choices made during the early design and construction phases set in place the long-term operating performance, as well as the long-term operations and maintenance costs for the more than 30-year life of the asset. Poor choices can doom the organization into incurring unnecessary lifecycle costs, reaching into the hundreds of millions of dollars for some large projects.”[3]

And since up to 95% of lifecycle costs[4] are committed by the start of operations, the opportunity to mitigate any value loss or leakage is perishable. It follows then, as mentioned previously, the earlier in the process the ORAT framework is implemented, the more savings it is likely to achieve.

 

Summary

It might be hard to fathom how, on a $1-billion project, as much as $300 million in value could be lost to unforced errors and inefficiencies. Even without a disastrous opening day, however, poor execution of operational readiness comes with enormous upfront costs and then slowly eats away at projects’ value over time.

The ORAT framework, implemented early and executed well, provides a repeatable, structured process for bridging the gap between construction and operations, delivering on the CONOPS’ promise, and for finding and fixing problems as well as preventing them from the outset.

 

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[1] Jumah Rashid Al-Mazrouie, Udechukwu Ojiako, Terry Williams, Maxwell Chipulu & Alasdair Marshall (2020): An operations readiness typology for mitigating against transitional ‘disastrous openings’ of airport infrastructure projects, Production Planning & Control, DOI: 10.1080/09537287.2020.1730997

[2] Emerson Reliability Consulting Whitepaper (2018): Operational Readiness: Bridging the Gap Between Construction and Operations for New Capital Assets

[3] Ibid

[4] Ibid

Tags: airport construction, ORAT, Continuous Operational Readiness

N. Ortez Gude

Written by N. Ortez Gude