..............

Value Creation Through

Eflective Project Management

The mining industry is very capital intensive. Competitionfor shareholder investment has never
been greater. Among our challenges is the need to meet shareholder expectations (return on
investment), and one area offocus lies in our ability to deliver value on our capital investments.
Our ability to meet project expectations affects not only the economics associated with the imme-
diate project but aLo directly influences our ability tofinancefiture projects. Moreover, our abil-
ity as individual companies to amact investor capital is influenced by how we have done overall
as an industry, and our industry track record has not been that stellar. With safety, scope, cost,
schedule, and quality as guidingprinciples, our project managers today must address high expec-
tations on every project. This paper examines some items that should be on today's project man-
agement checklist.

PROJECT E N G I N E E R I N G
Herbert Hoover, himself a mining engineer, said
Engineering is a great profession. There is the fascination of watching afigment of the
imagination emerge through the aid of science to a plan on paper. Then it moves to
realization in stone or metal or energy. Then it brings jobs and homes to men. Then it
elevates the standards of living and adds to the comforts of life. That is the engineer's
high privilege.

--pppp

* Phelps Dodge Mining Company, Phoenix, Ariz.

40 / MANAGEMENT SYSTEMS FOR OPERATIONS IMPROVEMENT

President Hoover then goes on to point out that

the great liability of the engineer compared to men of other professions is that his
works are out in the open where all can see them.... The engineer simply cannot deny
he did it. Ifhis works do not work, he is damned ...
And so it is with those involved in the execution of major capital projects. While
armed with advanced technological tools, the expectations placed on projects have
never been higher. There have been many books written on how to do projects and the
keys to project success, dissertations presented as to why projects fail, detailed audits
performed on what went well and went wrong, and post-completion evaluations to
determine if the projects have realized their operational and economic goals. Nonethe-
less, the scoreboard of recent projects in the area of mining and mineral processing is
less than stellar. While there have been some truly spectacular engineering accomplish-
ments, the metrics by which engineers view their work may be different than those used
by investors to evaluate a project. This paper highlights some key aspects of project eval-
uations and feasibility studies that improve the likelihood of success and then identifies
the five key areas upon which our project managers focus during project evaluation and
execution.

PROJECT EVALUATIONS AND FEASIBILITY STUDIES

The competition for investment dollars, the impacts of Sarbanes-Oxley on the details
and the process for proper disclosure, the perspectives of shareholders and the Securities
& Exchange Commission (SEC), the watchful eye of the analysts following our industry,
and the credibility required to access the financial markets all place more importance on
good project management and project success. Our companies are all trying to meet the
expectations of shareholders, regulators, analysts, investors, potential investors, and
other stakeholders.
The SEC, for example, is operating under a clear mandate to improve disclosure
requirements for mining companies. Before reserves for a greenfield project can be stated
by a mining company, the SEC looks for a bankable feasibility study. Their perspective is
that prefeasibility studies almost always underestimate actual capital cost. The SEC sug-
gests that for small cap companies, only 10%-30% of the reserves based on prefeasibility
studies are eventually developed. For larger companies, 20%-60% of projects based on
prefeasibility studies are eventually developed. However, the SEC has indicated that
60%-90% of the projects based on feasibility studies are eventually developed.
The article in Engineering Mining Journal (January 2002) titled "How Have We
Done?" (Chris Gypton, Senior Project Engineer, Hecla Mining Co.) is often referenced
when capital efficiency and capital cost uncertainty are discussed. The article analyzes
mining projects developed since 1980 and concludes that there is little doubt that the
average feasibility study estimate is far less accurate than companies and bankers would
like. The study concludes that actual projects overrun the feasibility estimates by an
average of 22%. A full 20% of the projects overran by over 40%. The impact of a 20%
overrun on a mining project can lower the internal rate of return by as much as 6 per-
centage points. These potential impacts are quite sobering.
 VALUE CREATION THROUGH EFFECTIVE PROJECT MANAGEMENT
1 41

It was interesting to note that there was no apparent correlation between overrun-
ning the estimate and those who compiled it. Studies assembled in-house and those pre-
pared by major consultants are equally likely to overrun. Upper-tier operators perform
no better than the juniors. Neither size nor location appeared to influence the likelihood
of an overrun.
There are several factors flagged that influence the quality of a feasibility study
including
Limited resources,
Limited time to complete the study,
Poorly understood site conditions,
Inexperience of the contractor and/or the client, and
Development time from completion of study through permitting and into
construction.
One reason for lack of project success is that some projects with questionable economics
advance to construction. Many projects advance from scoping to prefeasibility to feasi-
bility to board approval to construction because those involved with the project become
attached and project momentum can cany the champions of a project through weak risk
assessments that lead to overly optimistic projections. Some of these risks can't be over-
come even by the best project managers, engineering companies, and subsequent opera-
tors. Our message to our project managers emphasizes the need to work with the
engineering service providers and project proponents to ensure a proper and formally
documented risk assessment.
Among the more significant of project risks is scope creep. There comes a time in the
project when the scope must be frozen. A major project is challenging enough even with
a fixed scope of work. So herein lies an early conflict: the need for an accurate capital
estimate and the need to limit the expense of human and financial capital required to
evaluate a project to absolute certainty. There is a time for conceptual ideas to stop and
for engineering to begin.
Before leaving the discussion on the feasibility study, one obvious point bears re-
stating. There is no better time to build capital efficiency into a project than during the
feasibility study. There is no better time to increase the probability of financial success.
As you advance a project through detailed engineering and construction, your ability to
influence project success diminishes progressively. As the project advances, changes to
scope can only be made at a cost to other aspects of the project. Late in the project,
changes can destroy a project budget.
It is important to set aggressive capital cost targets during the feasibility phase of a
project. These targets can be based on industry-wide comparisons, operating experience,
stretch goals, and application of new technologies. These targets serve as benchmarks
for the project team to gauge progress. Too often we can reach the end of the study only
to learn that the scope and resulting capital estimate do not support advancing the
project. This could force a costly delay to re-work the scope and estimate, or worse,
could contribute to abandonment of the project over factors that could have been miti-
gated. It should also be noted that a greater level of engineering review and risk assess-
ment is needed when new technologies are being implemented to fully understand the
potential impacts to project cost, schedule, and subsequent operation.
42 1 MANAGEMENT SYSTEMS FOR OPERATIONS IMPROVEMENT

FIVE AREAS O F FOCUS

The five areas of focus that guide our project managers throughout the course of a
project are Safety, Scope, Cost, Schedule, and Quality. Following is a brief discussion of
the key factors by which we evaluate our project management effectiveness.

Safety
Good safety goes hand in hand with the project's cost and schedule. Safety is the leading
indicator of the overall pegorrnance on a project.
For Phelps Dodge, safety is a core value, and we believe safety on a project must be
institutionalized in our project managers, in the project team, in our contractors, and in
our service providers. You may be aware of our "Zero & Beyond" safety philosophy. The
only acceptable safety metric is zero recordable incidents.
In order to achieve this clear objective, safety must become woven into the fabric of
every employee and extend into the home and to activities outside of work. We therefore
promote safety off the job, which is the "beyond" component in our Zero & Beyond pro-
cess. We recognize that you cannot think "safety" only when on the job.
This same philosophy has to extend to the project and into the organization of any
contractor working on the project. Safe working conditions and safe working behavior
have to be an imperative. It is also an objective around which everyone can rally. I t must
become the mantra of the workforce.
Safety goes beyond ensuring a safe working environment on site. It goes beyond
requiring compliance with the relevant safety rules and regulations that apply to the par-
ticular site. It goes beyond MSHA & OSHA. In goes beyond the contractor's safety pro-
gram and performance. Regulatory requirements are the minimum standards against
which we gauge our performance.
During the detailed engineering phase of a project, it is recommended that a formal
hazard and operability ( M O P ) review take place. This is a step beyond a project audit,
which might look at a variety of health, safety, environmental, and regulatory issues. A
M O P review procedure will examine each process at a detailed level and systemati-
cally question every aspect to
Establish how deviations from the design intent can arise,
Evaluate and rank the associated risks, and
Establish a managed process to address identified risks.
The HAZOP review team will, in a structured way, identlfy potential design issues.
Many of their conclusions will be fairly obvious, such as a pump failure causing a loss of cir-
culation in a cooling water facility. The process, however, encourages the team to consider
less obvious ways in which the design could result in a problem. Phelps Dodge has utilized
third-party and in-house M O P facilitators depending on the complexity of the process.
During the feasibility study, Phelps Dodge also applies the first phase of its Hazard
Evaluation and Risk Assessment (HERA) program. The idea is to have a review, iden*,
and understand, even during this early stage of project engineering, both the execution
and operation-phase hazards associated with the project. This review will initiate a for-
mal process to control exposure and mitigate potential hazards during conceptual engi-
neering. Eventually, at a later phase in the project, job safety analysis and standard
operating procedures will be developed for each operational and maintenance task.
 VALUE CREATION THROUQH EFFECTIVE PROJECT MANAQEMENT
/ 43

The HERA program advocates "consequence thinking" with regard to constructabil-

ity and the potential impact of the proposed facilities on operations and maintenance.
Consequence Thinking is a conscious process of taking the time to think through a task,
identifyrng and controlling all energy sources, including individual behaviors so that
injuries do not occur. We believe that Consequence Thinking needs to be part of our pro-
cess, part of everything we do.
It is important to remember that hazards are equal to the sources of potentially
harmful energy, and risks are equal to the frequency and extent of our exposure to the
energy sources. So the three components of an injury are addressed in Consequence
Thinking:
1. Identify the hazards,
2. Evaluate the risks, and
3. Take steps to reduce the risk.
One thing to bear in mind when analyzing risk: most fatalities appear to be found in
the routine tasks with high-energy exposures.
Phelps Dodge believes that Consequence Thinking drives safe behaviors. We want
all employees, including contractors, to think about the next 15 seconds. We teach haz-
ard recognition so that employees will be able to identify hazardous energy (e.g., electri-
cal exposure, chemical proximity, overhead obstructions, suspended loads, moving
objects, and flammable materials). Thinking about the next 15 seconds will reinforce,
for example, lock-out tag-out procedures, tying-off requirements, and use of proper per-
sonal, protective equipment.

Scope
The scope of a feasibility study has to be of sufficient detail, the engineering and con-
struction criteria sufficiently defined, the completeness of the project sufficiently estab-
lished, and the accuracy sufficiently tight that the study can be considered "bankable."
At some point in the feasibility study the project scope has to be frozen, and at some
point in the construction, the stake has to be driven into the ground. There is often a mis-
understanding of what constitutes a trend and what constitutes a variance. It is impor-
tant to establish an understanding of these terms early in the project. Trends are costs
that are either higher or lower than estimated, but nevertheless represent costs associ-
ated with items clearly in the scope of work and required to deliver the project as it was
represented to the board of directors. Variances represent additions to or deletions from
the scope of facilities and were not part of the project as originally approved.
Having said that, variances are often warranted and can be justified on a stand-
alone basis if they enhance the value, operation, and/or safety of the project. These vari-
ances are often tied to future operating efficiencies.
At times, however, variances often develop as a result of a fundamental misunder-
standing of contingency. Our view is that contingency represents projected costs that the
project fully expects to incur. Contingency is an allowance for items that are known to
exist but have not been detailed in the capital estimate. Contingency is not an allowance
included in the estimate to cover additional scope items or discretionary expenditures.
Contingency is not money at large for use by the project. Strict adherence to variance
reporting and the approval process is absolutely essential to preserve the capital budget.
44 1 MANAQEMEMSYSTEMS FOR OPERATIONS IMPROVEMENT

Cost
When I talk about costs, I am really talking about controls. It is an understatement to say
that controls have to be in place to track incurred costs, committed costs, and forecast
costs on a project. A discussion around cost control is probably a worthy stand-alone
paper on its own.
The objective of project controls is to assure that detailed project scope, capital esti-
mate, execution plan, accounting systems, and cost/schedule controls are established for
the entire project at the outset. The timely implementation of adequate controls can
make the difference between project success and project failure.
A project control system is a complete and comprehensive process during which all
aspects of project execution are monitored and reported against the originally approved
scope of work, budgeted costs, and project schedule. The project control system provides
the basis for decisions whereby the project manager receives timely data from his con-
trols team and then follows up with the necessary corrective action. Project controls are
like many aspects of the project in that they require continuous cycles of planning, exe-
cution, and follow-up.
Project management is responsible for all project costs. Once approved, project
expenditures cannot be made or allocated without project management approval, nor
can changes be made without going through the proper management process for change
orders and variances.
Let me make a few personal observations. We generally do a good job of recognizing
how much money we have already spent. We do a pretty good job of recognizing com-
mitments that have already been made. If projects have an Achilles' heel, it is in their
inability to forecast expenses accurately. Some do a good job with this, but some are
notoriously inaccurate. If there is one area upon which the controls manager should
focus, it is on evaluating the work plan and the cost projections for that work plan. Then
he must monitor progress to make sure it is consistent with the work plan. One aspect of
the monitoring process is to ensure that the project controls group verifies all numbers
used to measure the progress of the project. This can be such a key aspect of a project
that independent third-party audits at critical junctures in a project should be consid-
ered. Early identification of any control problems is critical to ensure timely recovery.
The most sophisticated project control software is only as good as the cost control
managers, whether they work for the contractor or the client. The importance of the
dedication and diligence of these professionals can't be overstated. These are the people
who raise the flags on issues that need to be addressed by the project managers.
And finally, while the project controls manager is an integral part of the project
team reporting to the project manager, he must also have an independent line of report-
ing available to him outside of the project team to ensure all concerns can be advanced
to resolution.

Schedule
Maintaining the project schedule is critical to a successful project. It will affect the cost of
the project. It will affect the work plan. The first major indicator that a project is out of
control is when reporting fails to take place. Schedule impacts will follow.
The project manager must ensure that all work is scheduled, completed on time,
and accurately reported. This is facilitated through construction schedules with well
defined, measurable milestones, construction audits, walk-through inspections, regular
 VALUE CREATION THROUQH EFFECTIVE PROJECT MANAGEMENT
1 45

review meetings, comparisons of actual progress to the plan, identification of any devia-
tions to the plan, and follow-ups to corrective action. A strong project controls team can
greatly assist in these efforts.
There is no substitute for meeting with the key project personnel to review in excru-
ciating detail the status of each and every element of the project.

There are two groups that are going to look at the quality of a project with a critical eye:
the project team and its customers, the future operators. While the project team is trying
to satisfy many stakeholders, the operations team has to be at the top of the customer
list. Documentation of QNQC work is critical to a project and the project team's confi-
dence in the work.
Quality begins with vendors and the provision for equipment that meets the stan-
dards defined in the specifications. Audits of procedures and frequent checks on suppli-
ers' QNQC programs are critical and can often highlight supplier issues. In addition, a
well-defined,visible, and independent quality assurance program must be in place in the
field. Clearly established procedures, documentation, and follow-up will discourage
shortcuts by well-meaning contractors trying to make a schedule or budget.
In addition, operational checks made as part of the QNQC program during commis-
sioning and start-up, if properly documented and managed, will serye the operations
and maintenance teams long after project turnover. Initial measurements of perfor-
mance standards taken during the start-up will provide benchmarks to which later mea-
surements can be compared to support predictive maintenance and reliability-centered
maintenance programs.

SUMMARY
Most of the material presented above is not new to those of you involved in projects and
project management. The key, of course, is discipline. I want to emphasize that organi-
zations come to the project manager for a process, a process that if followed will result in
success. My point is that while we provide a process, it is still the skilled and diligent
project manager and qualified team that ensures the process is followed, that the key
project metrics receive the appropriate focus, and that the client is ultimately pleased
with the results.
Proper selection of the project management team is fundamental to the success of
the project. This applies to both the owner and the contractor teams. It is important to
note, however, that the project team, the owner, the various contractors, and other
internaVexterna1 entities do not necessarily share the same goals. The key is to bring
these interests together around project goals that can be shared by all. Some of the align-
ment can be structure in the contract where certain behaviors and performance can be
prescriptive and even rewarded. Some alignment can be achieved by simply bringing the
various interests together in a formal session to establish common project objectives.
A good project results when the project team accepts responsibility for the work
product and does not abdicate the decisions and accountability to the contractor. Spec-
tacular project failures have resulted when the client steps back and does not actively
participate.
46 1 MANAGEMENT SYSTEMS FOR OPERATIONS IMPROVEMENT

Within Phelps Dodge, our client is generally the host property that will inherit the
project upon completion. Phelps Dodge stresses maximum client involvement, and the
property will assign a point-of-contact as their representative on the project team. This
operation's coordinator will ensure that their personnel are involved in all phases of the
project. Their active participation not only establishes ownership but also ensures that
the project reflects any site-specific requirements, operating philosophy, or preferential
equipment specifications. From a project's point of view, the client's active participation
is essential to ensure success.
Harry Parker (AMEC Inc.) offered some good advice that is applicable to project
work: "Assume nothing...check everything ...trust no one." I would add: document
everything.
The following checklist supports the strategies I have already discussed:
Develop detailed scopes for the project work and the facilities.
Develop a detailed execution plan for the project.
Empower a strong project manager.
Select the "A" team with each key project management position staffed with a
qualified individual.
Establish a clear organizational structure.
Set high standards and expectations for reporting on the status of the project.
Implement proven project control systems and demonstrate that they are work-
ing properly as early as possible.
Over-communicate on all key issues.
m Build a project team with common objectives and shared values.

Develop a single point of contact for each key area of the project, especially at
interfaces between the contractor and the client.
Hold the appropriate managers responsible for the safety, scope, cost, schedule,
and quality of the project.
Plan the work and work the plan.
In closing, I would like to emphasize that a dedicated project team that is made up
of responsible and accountable leaders is the most important ingredient in the recipe for
success. To these engineers I take off my hat in acknowledgment of their accomplish-
ments. As Herbert Hoover said:
No doubt as years go by people will forget which engineer did it, even if they ever
knew ...But the engineer looks back at the unending stream of goodness whichflows
from his successes with satisfactions thatfew professions may know. And the verdict of
his fellow professionals is all the accolade he wants.