Transcript: How to Increase Performance and Productivity of Your Capital Projects w/ Stephen Mulva

What we found out is that there's really two things going on that's limiting our industry. First is our business model's not working. And second, the way that we plan and execute our operating system's not working either. And in fact, the number one reason why CEOs are fired is capital projects not meeting expectations. I really believe we can be exponentially more efficient in what we're doing.

I think we can do it for less cost and less time and, you know, with a lot more profitability for everybody who's involved. The construction industry is one of the only sectors in the economy that has not improved its productivity in the last 50 years, where we're getting to the point where it's time for us to move on to the modern economy. If we can do that, we'll find that the capital projects we're doing aren't the option of last resort. And I always say that I think they could become the first lever that executives are going to use to pull, to stimulate this growth and financial returns.

We have data here that says that most companies spend, most owners spend 32% of the time planning for a future that's really mostly uncertain. The very best business analysts at these owner companies or really anywhere can only foresee about two to three years ahead. If you have an agility to what you're doing, you can rapidly reconfigure and change with the business requirements. And that's what we call OS2. Hello, I'm Brittany Campbell Turner, and this is the Constructor Podcast, episode number 42.

Hello and welcome to the Constructor Podcast, the best way to build it. This podcast is dedicated to helping property owners have certainty in their decisions about their construction projects. We talk about fostering trusting relationships within your project teams, help you understand how to lower risk, be under budget and on schedule in your construction projects, and most importantly, exceed your end-users' desires. If you missed my discussion with Lee Stringer last week about how to advocate for a healthier, more productive workforce, check it out at Constructor.com slash EP41.

That's episode 41 at Constructor.com. So let's get into our interview for today. In this episode, I interview Stephen Mulva. Dr. Stephen Mulva is the director of CII, an organized research unit of the Crockrell School of Engineering at University of Texas at Austin.

His current research projects are focused on the performance and productivity of capital projects in most sectors of this modern economy. In addition to his responsibilities at CII, Stephen teaches graduate courses in construction engineering and project management at the University of Texas. Before coming to CII, Stephen taught construction management at Texas State University. He has held industry positions at Floor, Bechtel, Phillips Petroleum, and as a project management consultant for EPM. So in this episode, Stephen and I discuss CII's latest conference, and we talk a little bit about his talk, which covers the benefits of flattening the supply chain, stretching the dollar, and shrinking for agility.

So you'll understand a little bit more once we get into the talk. We further discuss the interdisciplinary research that CII is doing about the current business model of construction, and then we dig deep into the current operating system on which the industry works, and most importantly, how it can be transformed with key elements of a new OS called Operating System 2.0, AKA OS 2.0. So without further ado, listen in to our interview. Hello, Stephen. Welcome to the Constructor Podcast.

Thanks. I'm glad to be here. Great. So just to give the audience a sense, you are currently the director of CII, which is an organized research unit of the CrocRail School of Engineering at the University of Texas. Could you tell us about who and what your purpose to affect in the world and why you're doing that at CII?

Sure. I think at a base level, I'm somebody who's really quite passionate about the built environment and the nation and around the world. I believe strongly that capital projects are the basis of our civilization, and I think we're really affecting a lot of change at CII. Without capital projects, you just you really don't have education or energy or medicine or health care, really anything. And my history, my grandfather was a very small construction business in Wisconsin, and I used to drive around town with him and just really left a powerful impression on me what we're doing in this industry and who we're working for.

But I think we can have a much larger and a much more profound impact on society and humanity in what we're doing. And I believe that CII has been working in that direction for 35 years. I've been at CII for over 10 years now. Before that, I was a professor and a consultant and I managed construction projects at Flour and other companies. But for me personally, I think that CII is probably the best avenue for me to really impact and steer the trajectory of where we're going in this industry.

So that's really why I'm so passionate about what we're doing here at CII and why I'm at CII. So your research projects, they're primarily focused on the performance assessment and productivity of capital projects. Could you tell us a little bit more about that? Sure. Well, so the first eight years that I was at CII, I was really responsible as the associate director for performance assessment, which is benchmarking metrics.

In order to do research, we have to have data. We're pretty fortunate to have probably 25 years of data now at CII collected from all kinds of different companies. And so a lot of my research projects have been using that to improve things. Got a big project going on right now in Singapore where we're trying to improve the productivity of the maintenance and shutdown turnaround in industrial facilities. That's working pretty well, but we take that along with a bunch of other things at CII at a larger level.

And we have worked for more than three decades to formalize most of the industry's best practices. And so that actually gives us a launching point where we go from here. I think this legacy of the best practices in the industry, I don't take that lightly, but I do think it gives us a lot of credibility when we talk about the best years of this industry are just around the corner. They're just ahead of us. And I feel that strongly.

I think that our industry, when I talk to people, they think that things have to change. And I've seen that change just within the last couple of years. I really believe we can be exponentially more efficient in what we're doing. I think we can do it for less cost and less time and a lot more profitability for everybody who's involved. Absolutely.

And I think those who are listeners to this podcast likely feel similarly because that's a lot of what we talk about here, especially from the owner's perspective. So how do you create the most value for those who are ultimately going to be in this space or who the space, the built environment is going to serve? Sure. So I think what we've largely done as technical people, whether we're architects or engineers or project managers, we really embrace that technical side of things, the process side of things.

And I think the future is really about integrating more holistically across other disciplines and other fields. And in particular, I would highlight the financial, the I.T., the legal communities. A lot of times people in our industry kind of make jokes about that crowd. They're just the bottleneck keeping us from doing what we want to do. However, most projects are done for a reason.

They're done to either provide a financial benefit for a company or in the case of a public project like a school or road, to provide a benefit for the user. And again, that always involves technology, legal, finance, organizational behavior, so on and so forth. And in fact, if you look at university research in general, the trend for the last 10 years or more has been something that we call interdisciplinary research, which is, you know, think about a Venn diagram where we've got the technical or engineering aspects of things intersecting with things like finance or sociology or something else.

And so I see there's a really a lot of potential in that direction. And if I could, I would just say that even though I'm an engineer and have three degrees in it, I come from a family of entirely business people and bankers. I'm the only engineer. And so I have these conversations with my brother or my dad or other people. And over time, I've just had this real fascination with finance.

And I kind of think I'm an avid scholar. I might be an amateur scholar of finance and advanced finance. But you see that intersection with our industry and it can open so many doors. And I think that's really the key to our future is the more we can reach out and explore other avenues, it really opens a lot of opportunities for us to be a lot more efficient in what we're doing in capital projects. Let's step a little bit into the realm of what you've been finding with the research and what we're trying to collect.

And I think what you call it is the interim product design database, which allows the best practices to be available for access and people to actually take hold of them and do them. Let's talk about that. So the IPD and most people know IPD as interim product. Well, they know it as integrated project delivery. But what actually came first before it was known as that was we have acronyms everywhere in this business.

But yes, IPD interim product database actually came out of some research that CIA had done in shipbuilding. And we were really looking at other industries as ways of well, what are other industries doing and how could that apply in the capital projects? They studied shipbuilding because we had noticed over really about a 25 year period that the productivity in shipbuilding in Japan in particular had increased by 600 percent and the cost had gone down by 500 percent. I mean, these are just scheduled, gone down by 450 percent, just massive gains and try to figure out why is that?

And this interim product database was actually just a it's a library of designs, its component designs. And you can think about it as a kit of parts kind of plug and play. And so you'd have an engine room for a cruise ship or or oil tanker. It didn't matter. It was the same engine room.

But the bridges would be different. The ship itself would be different. And they really reuse designs. So they spent a lot of time on these designs. But then when it went to the field or the fab yard, the workers knew exactly what to do, how to build it quickly, how to put it together.

So the assembly methodology was different. So this is like I was talking before, is there was this world of shipbuilding and how they organized now starting to intersect with our world. What we call that in engineering is tech transfer. I think, again, that's probably the cheapest way, the fastest and easiest path toward a better future for our industry. Take a look at what's happening in other industries like aerospace, high tech, automotive, bring that into what we're doing.

And I think we really see some big gains. So we take that as a way of really challenging our conventional thinking. That's taking us into a new place now where we started to see, you know, read all the tea leaves and start to see a real clear, definitive path to the future and how we can get there, both in our business model and in our the way we operate and plan and execute our projects. And it sounds like not just based upon design, it goes back to the interdisciplinary research, right?

It goes back to pulling all the information that you have available and simplifying it so that there is a process, whatever the planned execution is of the built environment or like the ships. But it's just clear. Everybody knows what to do and they know how to get it done. A lot of upfront work to collect it and design it properly. But in the end, it I mean, 600 percent faster building.

I mean, who doesn't want that? Right. Sure. Sure. No, that's right.

I mean, I think the easiest way to say this is that everything that we do in capital projects, for the most part, is a prototype. It's the first time we ever did it that way. I mean, it's a miracle that they work and function as well as they do. But the process to get there is not unlike a prototype, the new prototype Corvette that you would see at the auto show that it looks like what it'll look like three years from now. But, you know, it doesn't work.

It doesn't have a functioning air conditioner. It probably doesn't even have an engine under the hood. But what we do in our industry is exactly that. Everything is temporary and unique. That's the definition of a project.

So the shipbuilding thing was really this tech transfer to see, well, how do you get to a point where it's more of a production line and more in manufacturing? Still large scale, still modular. But yet by reusing these designs, really get those gains in productivity and cost and schedule like I was talking about. So we talked about IPD, interim product design. Is that what the operating system OS 2.0 is based upon?

So not really. It's one of many things. We ran a series of workshops this summer. What we found out is that there's really two things going on that's limiting our industry. First is our business model is not working.

And second, the way that we plan and execute our operating system is not working either. And so there's a need to do both. But what you're referencing, OS 2 operating system 2.0 is a completely different way of going about the planning, the design, the production, the construction. But it sits inside like an engine sits inside a car. This operating system sits inside a business model.

And I think that's the thing that we realize is that the business model we've got and our approach to planning, design and construction isn't working. It's really not working for anybody. In fact, it's just too slow, too expensive. The crazy part about this is that owners will just say, oh, this is it's too slow, it's too expensive. And then the contractors will say, you know, we're not making any money.

And so you think, well, where's all the money going? We've got an answer for that because we've been studying that. I'll get to that in a second. But the thing that you can identify from this, the reason our business model and our operating system is not working is you see that our companies are failing. The stock market's up 17 percent in the last 12 months.

If you look at the Dow. And yet we have these major blue chip companies, EPC firms, and their stocks down 49 percent, 22 percent since the start of the year. Rising tide should lift all boats. Right. But yet we see that some of the best companies in our industry, it's not happening for them.

And in fact, I've been reading a lot lately. I read a lot of other things that aren't just construction. But what I've seen is that they say we might actually be at the start of the next major boom in our economy, that unemployment's never been, you know, we're under five percent unemployment. Interest rates are low. You can get a loan for a house under mortgage under four percent.

You can buy a car under two percent loan, so on and so forth. These are what economists look at and they say, actually, that that's starting to signal a boom. But I think we're at a place where our capital projects industry might just be caught flat footed. You know, we're not we don't have the right business model and the right operating system. And so this hopefully this doesn't pass us by.

As I'm listening to myself, I'm like, man, this is starting to sound kind of gloomy. I'm not trying to pile on. But in fact, if you go to Elon Musk has a new company called The Boring Company, they're there is to do Hyperloop and make tunnels in the ground and this kind of thing. And if you look in their frequently asked questions section, there's a quote in there that says in the U.S., there's virtually no investment in tunneling research and development and in many other forms of construction.

And the construction industry is one of the only sectors in the economy that has not improved its productivity in the last 50 years. Listen to that and you look at the stock market and do all these things. You're like, wow, we're not in a great place right now. We got to get on with something better. And that's a reference my comments before about people are ready for this.

I mean, everybody is ready for this. Absolutely. It almost seems like there's a priming taking place. Right. So there's there's so much happening in the economy around us, whatever the other markets might be, whether it be financial, whether it be retail with omnichannel distribution, fulfillment centers with Amazon, as we know.

I mean, there's there are a couple of things going on and we see that taking place. Like you said, we might be just standing flat footed. But if we see the opportunities and do the research and do the investment in cross educating ourselves and taking on the data from other markets, why wouldn't this be the opportunity where this could flip on its head? Right. Right.

And that's really where we're getting to the point where it's time for us to move on to the modern economy. We can do that. We'll find that the capital projects we're doing aren't the option, the last resort. And I always say that I think they could become the first lever that executives are going to are going to use to pull to stimulate this growth and financial returns. We actually did a study probably about four or five years ago that from the early 90s to sort of the 2013 2014 range, the cash flow, how companies got cash flows really declined.

There was a 95 percent correlation in the early 90s between cash flow and construction projects to 20 percent correlation only a few years ago. And as we dug a little bit further, we basically found out that companies just said, look, we can't rely on those capital projects, folks, too unpredictable, too risky with much better certainty. You know, we can improve our cash flow and our financials by buying an asset, by buying another company, by stock repurchase. All of these things are a lot less risky than taking on another capital project.

And in fact, the number one reason why CEOs are fired is capital projects not meeting expectations, which is interesting because it really tells you why they a lot of them kind of get gun shy about taking on a two billion dollar project somewhere. And so this is where, you know, if we do move on to the modern economy, we can really accelerate business returns that are coming from that. And if we don't, I mean, there's just a whole set of projects that are not even doable right now.

They're not economically viable. If you look at like deep water, offshore oil and gas type projects, the project approach, the operating system, it takes too long, too much time and money. The technology is pretty old. Combine these things and the commodity price can't pay for it. Infrastructure is the same.

It's extremely expensive. The current administration in the US talking about a trillion dollars of infrastructure, probably over a decade of time, 100 billion a year. But for a trillion dollars, they've prioritized this list of 94 projects. And I just look at that and I just get really discouraged. How can this country spend a trillion dollars and we get 94 projects if everything goes right?

I mean, this list should be like 194, 294 projects. You would really start making a difference in society if you could do 294 projects with a trillion dollars. So I think we can just do a whole lot better. I think we can do a lot better for the companies. I think we can do a lot better for society, for infrastructure, so on and so forth.

So that's really what we're trying to take on here at CII now. I'm really happy as to the goals of CII and what you're trying to achieve. It's amazing that 94 projects is the number and there has to be what we call contingency built into that number because of the track record that construction has being late, over budget, things of that nature. So take a little bit of a step back really quick. You guys just had a conference in August.

Could you tell us about the central theme of the conference and some of the highlights? Sure. Yeah, it was an interesting conference because it was the first time we really changed the structure of it. We put everything in one room. We used to have all these breakout sessions and people couldn't see everything that we were working on.

We changed that around. But I think the other big thing that we did was we really focused this on transformation. Actually, the name of the theme was innovate, disrupt, transform. And there was just a great energy about it. Again, these people in our industry are really responding to this.

The way I describe innovate, disrupt and transform, it's kind of like Uber. You know, an innovation in transportation would have been, OK, the taxi cabs all come up with an app, you know, instead of calling them on the phone, go on your iPhone and get a cab to come to your house, take you to the airport, whatever. The disruption was Uber. Now it's ride sharing and much more efficient platform because now you don't actually have to own any assets. You know, they don't own any assets.

They don't have any really employees, just people with cars and transporting people around. But the transformation is the automated car. And that's the thing is like, how do you think out into the future? So I think the big change for our conference and for our attendees was we're not just talking about best practices. I actually talked to somebody the other day and they said, you know, best practices equals outdated, which I thought was pretty interesting.

Well, and well, because you just, you know, hey, let's go around the table and talk about, you know, what do you do and what do you do differently? And OK, the next guy or the next lady, what do you do? Well, tomorrow, that's just what they're doing yesterday. So it's outdated. So thinking about, you know, where do we have to take this industry is something I worry about a lot as a director of C.I.I.

How do we do that? In our conference, we got these speakers to really talk about how do you transform the industry from the inside out now? Because I'm really worried that people are going to look at our industry. There's going to be some financial types that maybe they can snap up some EPC firms pretty cheaply. They can part them out.

Who knows what's going to happen. But disruptions are going to happen in our industry. But I think we're really after transformation and I think we're the best people to do it from the inside out. And so we had some speakers, Billy Bean, if you saw the movie Moneyball or read the book, he's the general manager of the Oakland A's. He reinvented baseball from the inside out, really taking a look at data and what are the things you need to do to earn wins.

And so there's a lot of parallels between what they did in baseball and what we can do in our industry. I gave a talk really emphasizing there were kind of three things that we could do. And some of these are part of us to flattening the supply chain, moving to a modern economy, which the hallmark of modern economy is what we call thin platform. Stretching each dollar, you know, one of the problems we've got in our industry is we're always on the wrong side of the dollar, like.

The borrowing side, not the investment side, you know, we put work in place and then we bill for it. Well, OK, well, who paid for all the work put in place? Yeah, that's on the borrowing side, so we have to take out a line of credit to do that. And then the other one was, you know, shrinking fragility. I think we're building at the wrong scale.

And this isn't possible in everything. I mean, you can't like build a half scale hotel. People are certain height, you know, but you can certainly do that in in a lot of manufacturing, oil and gas, power generation, whatever. But if you really shrink the size down, it's amazing. The economy is a scale you pick up.

And this idea of miniaturization and manufacturing more than modularization. And I think these were just conversations at our annual conference, honestly, that people really hadn't heard before, but it made sense to them. And so they they got really energized by it. So that's good. It is.

And, you know, there was one other thing when I was investigating your talk at this past conference that you mentioned, and it was about the construction being multiple layers similar to a pyramid scheme. Could you tell us a little bit about that? Sure. Yeah, this goes also back to the business model I was talking about. So what we've got now is a pyramid scheme and all the negative connotations you can think about.

Pretty much most of them are applicable. So think about this pyramid where the owner sits on the top and they're issuing command and control style from the top down. You know, these are engineering specs. You guys better do this. This is how we pay for things.

This is how we want to design, you know, blah, blah, blah. But they're pushing this down through layer upon layer of a bunch of companies. So next underneath the owner, you've got CM firms or an EPC firm under them. You've got their subcontractors under that distributors under that suppliers, vendors, raw material companies, so on and so forth. You might have conservatively eight to ten layers.

Well, what happens at every layer is you're accumulating overhead and you're accumulating inventory and you're all the things that if you go to business school, they'll tell you like don't manage your inventory. It'll kill you. Don't manage your overhead structure. That'll kill you, too. So as overhead and inventory goes up, profitability goes down and the inefficiency goes up.

So we got to get on a different business model. And the modern economy is a platform or a platform or platform. So, again, I'll use an Uber example. It's really just a thin platform. And actually, it's a platform of platform.

So you've got the iPhone platform, the Visa card platform, the GPS platform, all which came before Uber did. But what Uber was smart about is they said, OK, we're just going to build this app. It's a thin platform. It separates the assets from the cash. So, again, the assets being the drivers in the cars, the cash being, you know, the customers who have some money they want to go from A to B.

The cool part about this is Uber doesn't own any assets. They don't need anything to satisfy the customer. So they're just kind of playing matchmaker. So the question here is, well, what if in our industry we used all our assets? And I mean, there's human assets, there's engineers and architects, there's assets like plant equipment, there's construction workers, there's cranes, there's insurance companies.

What if we applied this uniformly on a thin platform? So you didn't have this pyramid scheme. You didn't have this multiple markups, multiple overheads. Basically, what you do is you get much more efficient and profitable. Something like surety and bonding, for example.

Most projects are in the neighborhood of 350 to 400 percent overinsured because you've got performance and payment bond requirements. You have safety and insurance workers comp requirements at every level of pyramid. Well, it's so overinsured that actually right now if you have an accident or a claim, you end up in court because there's four different insurance companies all telling each other to pay. And the judge basically has to say, OK, well, four of you all insured the same risk. So you're paying 25 percent again, horribly inefficient.

That's time consuming. You probably have to get a legal counsel just to go to the court just so you can get that ruling, so on and so forth. So when you go to a thin platform, everything becomes much simpler. The transaction becomes simpler. When you use Uber, for example, do you realize there's actually a legal agreement?

You agreed to the legal agreement the moment you signed up for Uber. It was that eight page thing that you scrolled through quickly, got to the bottom and clicked agree. But in all that verbiage in there, I think it says in there that they have the right to buy your your your house for 400 bucks. But you didn't read it. You just scrolled down there, hit hit agreed and and off you go.

And so that's the thing with this thin platform. You think about, OK, well, if everybody now may be sounding too utopian, but there are some rules of the road. And that's really where the modern economy went was there's some basic rules of the road. There's how it works. And people who want to be on this platform can do it.

People who don't don't have to do it. They can live in the pyramid scheme. It won't work for very long, but that's what could happen. And the other part of this is this idea of vertical integration. In the past, you had Henry Ford's famous for owning the mine with the iron ore and then owning the boats to bring them to a foundry to make the steel, to put in the car, et cetera, et cetera.

But you have a bit of that like an EPC. If you can just vertically integrate, if you can acquire the engineering or the construction part and you pay an investment bank 10 percent interest to acquire the debt capital to go get that extremely expensive to do that or even vertically integrate to round out all your service offerings like, OK, well, we don't offer this type of engineering. So, you know, we'll go acquire another firm that can do that kind of engineering and then we'll have a more rounded offering.

And again, in the modern economy, you really don't need that because all those various companies can be much more profitable just applying what they have directly onto that platform. I have so many questions, so I'm going to just start with one because it's a lovely model when you think about the flattened supply chain opposing this pyramid scheme, right? It's everybody has the right information at the right time. You're not like the example, like you said, you're not overcompensating because you're not knowledgeable about what to provide like the insurance companies, right?

It's one of those things where the transparency itself is really appealing to kind of get back to OS2, which is really what we wanted to talk to you about today. You said that's the operating system and there are two things. There's the business model, right? And then there's the operating system that needs to be revised. You kind of started touching on on these items telling us about the conference.

But if we could dig in a little bit more about the operating system and what that might end up looking like, say it is applied and we realize some of those benefits from it. Yeah, so I think the main thing is that we've got to move to something that's we're working in parallel. And that's what you're talking about when we go to this thin platform and not in series. The main problem with OS1, the one we've currently got operating system one is I call it the plan, the work, work, the plan.

But the problem is it doesn't work. So it was designed for something that's 100 percent scope certain and you've got a lot of time. I mean, there's very few of these types of projects. The only one that comes to mind right now is where EPA says to a refinery, OK, you've got to hit this certain environmental compliance target five years from now. And they say, OK, great, we want to minimize the cost.

We got a lot of time to figure that out. But really, that's not how most projects go. The other problem with the plan, the work, work, the plan is we have data here. It says that most companies spend most owners spend 32 percent of the time planning for a future that's really mostly uncertain. The very best business analysts at these owner companies or really anywhere can only foresee about two to three years ahead.

And even that's variable in terms of what can you sell the product for, how many people are going to buy your new pickup truck or your new coffee or your diaper or whatever it is that you're making. So what's happened is that the business cycle and the commodity pricing is totally variable. But we've got this illusion with those one that what we're producing in the project is exactly spot on. We know exactly what the capacity is. We know everything about it.

That's not true. And other people who have done this, like software, for example, they've moved to agile management, agile scrum. If you have an agility to what you're doing, you can rapidly reconfigure and change with the business requirements. And that's what we call OS 2. The main hallmark of that is this agility.

If you're continually planning and executing, it's not sequential. OS 1 is OK, plan for 15 months, design for, you know, another 10. Maybe overlap that with some construction out in the field. But four years later, you get your whatever you're looking for. And then the big problem with that is the business outcome isn't there.

Like I was talking about how EPCs make 300 percent of their profits on 40 percent of their projects. So if you order an EPC projects from most profitable to least profitable, what you'll find is that the bottom 60 percent lose 200 percent of the profits. And the top 40 percent make 300 percent of the profits so that at the end of the year, you know, 100 percent of the projects make 100 percent of the profits. And so OS 2 comes in and it's like, no, we're going to continually change what we're doing.

We're going to plan and execute as we're going through. That's going to make us much faster. And it's also going to allow us to continually look at where the business is headed and we can better hit what the business requirements are going to be in the future because we don't actually know that as we're going into this. Not with much certainty. Right.

And so that's where you're shrinking for agility. Right. So you can get you can get the benefits from shrinking that one set of process and learning from it. Next step. Yeah.

And one of the ways to preserve that business case, and we've done some work just real recently on this, is to try to think about what's the right size of capacity that you should aim at. And we're thinking the answer is 40 percent, which is just kind of crazy to the conventional way of thinking. So 40 percent of whatever the capacity is that the business analysts are telling you that they're going to need four years from now or three years from now. So if we put that in terms of just to make it easy, like an automotive assembly plant, they think they can make a thousand cars a month out of this thing.

We could make a thousand cars and sell a thousand cars a month. You should actually just build a plant for something that makes 40 percent of that. So 400 cars a month. And then what you can do is you can come along and build an identical plant. Maybe next to it, maybe somewhere else in the world if you need another 40 percent.

But you don't need to necessarily know that until you're part way through the first project and you're starting to sell some cars. We know at a minimum that whatever the thousand car estimate is, is 100 percent wrong. That's there's no chance that that's going to happen. It's either going to be above that or below that. So if we do the first 40 percent, we're absolutely positive we can sell 400 cars a month out of that.

But then here's the cool part is if you just repeat that design, you can get to 800 cars a month or 1200 cars a month or 1600 cars a month. You'll just see how the market pans out. Now, people in the car making business say, well, that sounds kind of inefficient because, you know, it's always better to build bigger. You know, we can get some bigger robots out there to weld the cars together and stuff like that. I would push back on that a little bit.

I think there is some element of truth to that. That's the six tenths factor that engineers are trained in. But they're discounting the economy of scale when you buy a lot more things or just the how much cost savings there is in not only the production, the construction, but also the maintenance, the ongoing life cycle part of this smaller things that are more off the shelf. That tends to be a lot more efficient for you as well. So if you build some of this agility into even what you're trying to build, like in terms of the percent capacity, you're going to have a much better financial outcome.

And I think that's probably the main objective function of OS 2 is how do we get the right financial outcome that we're looking for? Because building a project. Yeah, it's cool to build a project, but it's really not about cost and schedule and technical deliverables. It's about what does this do? What benefit is it providing to shareholders or your customers or the society if it's a public project?

Absolutely agree. I'm glad you pointed that out. So are there seven elements of the operating system? And if so, I mean, could you just walk us through seven elements go back to work that's been developed really over years and years and boiled that down to these seven elements. I think we're just discovering that maybe we can combine some of them.

Maybe there's some other ones that come in. It'll take two to three years to figure out all these aspects. But at a base level, the seven things, the first one would be we call it corporate governance. And that's really the relationship between business and the project. A lot of times these the business and the projects like oil and water, they don't really speak the same language that I've always offered to engineers.

It's incumbent upon us to speak the language of business because the business people aren't going to speak the language of engineering. How do you do that? The second part of corporate governance is we manage everything by project. I used to work for a big EPC firm. They had 2100 active projects.

It wasn't really one corporation. It was more like 2100 small corporations. That's how you get to the 300 percent profits from 40 percent of your projects. So the way you get around that is you manage a lot more things from program management or at the enterprise level. Also, if you can integrate capex and op-ex, that's really the holy grail of life cycle.

And then I think also really questioning who's the owner. I mean, the owner does several different things, right? Traditionally, there's about three things. One is come up with the idea or what's the scope. Another one is come up with the money and another one is operate the facility.

Well, you don't need a traditional owner to do all of those, right? We can hire somebody to come in and run the facility if you'd like as a contract operator. We can certainly get money from other places than just your traditional owner. And so I really believe that, you know, you get to about five to 10 years out and two thirds of what we build aren't going to be financed by traditional owners. It's going to be private equity firms.

It's going to be another couple of different kinds of things. So in OS2, really examining that corporate governance and where's the money and what's the idea, how's it coming from? That's one thing. Second element is called relational contracting. And of course, that's the other IPD.

That's integrated project delivery, which at a base level, you know, you've got your traditional owner, you've got an architect or some engineering firm designer, you got your contractor, you bundle them all together in a three party contract. You get some benefit out of that. I would just probably say the second part of OS2 would be, you know, this commercial model. And that speaks to the business model a little bit. But the relational contracting is one of the most important pieces of that.

However, I would also challenge people to think beyond three entities or even five entities. Think about how do you do it with 200 entities? If you have a 400 million dollar project, there are 400 separate companies working on that project and they all have contracts between some of them. And the contracts are not aligned. And again, this is the thin platform coming back.

There was actually an economics professor at Yale who studied this concept of bundling, which is what relational contracting really is. And I've worked through the equations. The math is kind of complicated. But if you get to six main entities in a bundle, and the reason he studied bundling is actually he was frustrated with Microsoft Excel. He thought it was an inferior spreadsheet.

He liked Lotus 123 better, but he was really frustrated that he couldn't buy it separately. And that's because there's there were more people who preferred the bundle. It's like, yeah, well, for one price, I can get Microsoft Word. I can get, you know, PowerPoint. I get other things in my bundle.

I don't have to go around and buy all these individual pieces of software. So in our world, if we put six people in the bundle, your modeling shows you get a 22 percent cost discount and you get a 262 percent profit increase for the six different organizations that are in the bundle. So this is why integrated project delivery and the IFOA, they call integrated form of agreement. That's why that's kind of taking off, because there's some inherent built in things in there. In fact, a two party bundle, which I call design build, that has some actual discount and some cost advantages in it as well.

But I think that we really haven't hit the full potential of that, because, again, it's not that modern economy, that thin layer. So that's one thing we'll look at there. Third element of OS2 is design. I already talked about miniaturization, but design reuse is a huge one. That may be like Billy Bean figured out on base percentage one games.

I think we could find out that design reuse actually leads us to much more efficient projects. And the overall goal of OS2 is a 50 percent time reduction, 35 to 40 percent cost reduction, but a much better capturing of those business objectives. The other part of design is we may have the wrong people doing it. I think a lot of other industries have gone to supplier led design. Boeing cut two years and about 40 percent of the cost of developing the 787 by using 50 tier one suppliers that did all the design.

As an owner, Boeing's role changed from that command and control thing I was talking about before in the pyramid scheme to basically inverting the pyramid and supporting everybody above them. They just resolved interfaces where they cropped up. The suppliers actually surprised them because they came back and they said, you know, we can build a much more competitive and better jet if we do everything electrically. The climate control, everything in the whole plane is electric. So it's the first Boeing plane that, for example, the anti ice on the wings is not heat from the engine.

It's electric heat. So if you go to supplier led design, I think that and more design reuse, you can maybe get somewhere. The fourth element I call production systems. The management science we've got is from the 1950s. Critical path method was 1956 to lobby method, 1952 per 1958.

This stuff's old and it honestly it doesn't really work. The plague of our industry, I may be the only person you hear this from, but earned value system just really doesn't work. And it's a shame because it's really the implementation of it is flawed. But we've got modern computing technology. We can do modeling and simulation.

We can look at our supply chain and our logistics and our flows on a real time basis. Other industries have done this. And so how do we do that in our industry? I think when we do these production systems, the objective function is not going to be cost and schedule quality and safety necessarily, although those are important. But they're really intermediate measures on for our production system to focus on return on investment and these business metrics like earnings per share and things that are resulting from how we do production.

Fifth, I call technology and systems. And most people say technology, they immediately think about, you know, 3D CAD or something like that. Certainly those things are important, but a lot of the advance can be again with the suppliers innovations in multifunctional equipment. Air separations companies have reduced their footprint by 75 percent, mainly because one piece of equipment does five functions. And you won't see that in a typical heavy industrial plant.

You'll see one piece of equipment does one function and you got a bunch of pipe and wires connecting it all together. Six is human resources. So we are going to have humans doing all this work, doing the engineering. The issue people talk about right now is productivity. I think that's a little bit misplaced because they're trying to figure out how to get more production, but not really altering the means and the methods.

It's like digging a ditch. I can have 100 people out there with shovels and wheelbarrows and I, you know, they can do a nice job of digging a ditch. And, you know, we can find the hardest working crew of 100 we can find in the whole world. They, you know, these people don't even they don't even take a break to take a drink of water. They're working like 95 percent time on tools.

And but yet, you know, we can get a hydraulic trackhoe out there, one of them, and it can blow these these people out of water in terms of production. That's the thing we're not really thinking about. You know, we're not challenging the way of how are we going about the production. We're just trying to improve the productivity. It's like, well, we just get those people to dig a little faster, maybe 10 percent.

You know, we're missing the huge gains. The other part of that is the training. So in an OS2 environment, how you think about this, how you interface with this business model or the thin platform is different. We've got to really ramp up our education in terms of organizational behavior, financial and business acumen, team chemistry. How do those work together?

That's all under element six. Seven is it's the research and development joint venture that's coming together for this. I've been traveling around talking with a bunch of people. Sixteen million dollars, about a fourth of that's funded from industry groups, associations. Similar to CII, 12 millions from companies.

And again, there's a lot of energy for this. I could be wrong. I need to find some wood around here to knock on. But it's really different thinking, these seven elements. We don't have everything figured out.

I mean, that's why we've got to do two to three years of research and development. And it's all in these different areas. It's legal, finance, sociology, organizational behavior, name it. And it's really those multiple Venn diagrams coming in and changing what we can do and how we can do it in our business. If you like this topic and would like to hear more of a similar discussion I had with Jeff Saunders from Copenhagen Institute of Future Studies, check out that episode at Constructor.com slash EP 38.

That's episode 38 at Constructor.com. Now back to the interview. Thanks for taking us through the different elements. I think that all of them are key. And what do you think are the top things owners should be doing right now to adapt this new model of working even before it's ready to go?

Is there something they should be thinking about now? What should they be doing? Yeah, it's a great question. I mentioned this before, the project people and the business people like oil and water sometimes, they're both right. The more that especially people working in the owners community that they can work together.

So the integration with the business and understanding how to be more agile and flexible. What are the degrees of freedom even in the OS one model? What are the different options we can take and how long can we preserve those options? And a lot of project people will say, oh, my gosh, that's going to be a train wreck. I don't think so.

I think if we're really smart about it and we can meet the business people halfway, that'll really help us. Another thing for owners to adopt or develop the right mindset to move towards an OS two eventually, you know, while we do the R&D to figure it out could also be this 40 80 120 concept that I talked about before. Like, don't spend 15 months trying to figure out the capacity or the project absolutely perfectly to 15 decimal points, because as I said, the estimate of the capacity that's going to be needed three or five years from now is 100 percent incorrect.

So let's just get going on to something that we know how to do, that we can start on pretty quickly. If you model this financially, actually, it works out much better because you you get to your returns much quicker. And that can actually fund your your future development while you also figure out if there's a market share. And then I think probably the last thing I'd recommend for owners is trying to figure out how you can reposition for the project people inside of an owner. How do you reposition yourself and try to move from being a cost center to a profit center?

And that could take all kinds of different things, different directions. But some people have done this. They figured out a way to drive more profitability out of their facilities and and think differently about it. We actually did a project with Gretchen Gagel and her team at Continuum Advisory Group. And we gave the report summer of 16 and the report was titled Order Takers or Value Creators.

And we ranked probably there were 35 different owner companies that we interviewed extensively at both the project level and the business level. And basically the thing we found out is the project people just sat there and we waited for the phone to ring. And when it rang and somebody said, OK, we need a new engine plan or we need a new power plan. They said, OK, cool. We know how to do that.

We're highly skilled. We're competent. We're mature in our knowledge of engineering and construction. And we'll go do that using OS1. And the value creator was different.

It was somebody that was saying, we may not know everything about this business, but let us offer some suggestions about ways we think we could actually make more revenue or earnings per share. But yeah, they could come up with ideas and present that to the business unit and talk about, you know, hey, look, here's this thing we think could have some value. Now they may get shut down 90 percent of the time. Boy, that 10 percent of time that they bring something to them, it could really be awesome.

It could change the whole trajectory of where the company's going. So those would be my three recommendations there. I would stand by those 100 percent. In addition to that, do you have any resources that anyone, any of the listeners would benefit from that you could recommend? Well, obviously, CII is one is a great resource.

Even if you're not a member of CII, you can still get engaged with what we're doing through our website and get our publications. But I think there's several partner organizations that are going to be involved in OS2. And a lot of people are probably members of those like Lean Construction Institute or CURT, which is Construction Users Roundtable Project Production Institute. There's probably several more on the on the horizon, too. We definitely need the input from people.

But I think that development process, one of the things we always see in in doing these research teams is that the people who are involved actually get a lot more out of it than they think. It's really developing them as leaders because, you know, generally they're in a room with people that don't work for them. So they can't boss them around. They develop leadership is, you know, how do we collaboratively do this? I think forums such as yours, to be honest, are great.

The more that people can listen to some podcasts and do that. I think there's some interesting things going on out there. One of the workshops, we had some different speakers, we had some futurists, but a guy named Kimon Onuma is an architect. And he's come up with this thing called Bim Storm. And he's doing some just amazing things, especially in the design arena and how it relates.

One of the groups that my understanding that he worked with was the U.S. Department of Veterans Affairs. And, of course, the VA is an awesome organization. They're really great. But on the project side, unfortunately, they seem to find their way in the E&R frequently.

They're working to fix those things and they're super committed. But one of the great things that they did in working with Kimon Onuma was they posted all their data, everything about their facility. You know, it's like down to the color they used to paint the operating rooms. And they posted all the data out there and they basically just said, we're freeing up this data. We're making it publicly available, everything about our facility, because we want anybody and everybody to take a look at it and comment on it.

Tell us ways of getting better. That's such a radical departure from the way most owners behave. They think everything's absolutely proprietary. Now, certainly the formulation for Coca-Cola or Budweiser is proprietary. But the process by which bottle Coca-Cola, I don't really think that that's necessarily proprietary.

So it's something that, you know, they could free up that data and they could let the supplier community, they could let engineers, they could let all these kind of people come in and say, hey, have you guys ever thought about doing this differently? So on and so forth. So these are maybe recommendations of places to go look. So take a look at the VA on how they posted all their facilities data. I think it's it'd be pretty interesting for people to to look at.

Yeah, definitely. I'd like to make sure to direct people to you if they'd like to get in touch. What's the best way to reach out to you? My email and contact information is on CIS website and I think probably just interfacing with CII construction dash Institute dot orgs our website. Really, I think any body at CII, our associate directors and our staff certainly will be helpful for anybody who wants to contact them.

I'm certainly happy to talk to any of your listeners to if they have comments or questions or want some help or anything. We're here to obviously serve our member companies and organizations, but we're mainly here to also serve the wider industry, make it more predictable, make it more efficient. And that's kind of what we're up to. And with that, I'd like to thank you for doing this interview with me. It was a pleasure.

Absolutely. It was pleasure on my end too. I appreciate it. I really enjoyed this interview with Stephen. If you liked it, too, let me know at Brittany CT on Twitter or on LinkedIn.

I'm easy to find to search Brittany Campbell Turner, or you can just email me at Brittany at constructor.com. I want to know how this podcast has helped you. Again, the email is BRTTANIB at ConstructRR.com. So looking forward in the next couple of weeks, I'll be doing a series about blockchain and construction. I will talk about what it is, how it can be used and talk with practitioners about how it already is being used in construction.

The possibilities for increased trust and transparency when using blockchain can get pretty exciting. And it'll open up some doors to pretty amazing possibilities. So looking forward to that over the next couple of weeks. Don't forget to subscribe at Constructor.com to get email updates from me. If you haven't already subscribed to the podcast, you can do so at iTunes and Stitcher.

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