Around the world, the resources needed for big new capital projects are scarce. Shortages of everything from commodities (such as steel plates and cement) to engineering, procurement, and construction personnel are delaying projects significantly and generating cost overruns for new factories, refineries, and mills.

Nowhere is the pressure greater than in Asia, where more than 50 percent of the world’s capital investment is projected to take place over the next seven years.¹ As many Western companies tap into the region’s rapid growth, they are finding that the best Asian companies enjoy more than just a home field advantage. Indeed, these formidable competitors have out-performed not only their Asian rivals but also the global heavyweights both in costs and in construction times for major industrial facilities. Reliance Industries, India’s largest private-sector enterprise, for example, built a world-class oil refinery and petrochemical complex in Jamnagar with 20 percent less capital than similar plants elsewhere require, and its time to commission was 30 percent lower. Increasingly, Asian companies achieve such gains while meeting the developed world’s quality and safety standards. Such successes will strengthen the hand of these companies as they branch out to compete for capital projects in the West.

To get a better idea of how some Asian companies have completed projects so quickly and inexpensively, we examined six greenfield and four brownfield projects in a representative sector—oil refining—and compared Asian refineries with those built in the West and in the Middle East. We found that roughly half of the cost and time difference was due to local Asian conditions, such as land costs, taxes, and regulation, and to practices that were neither common nor transferable elsewhere. Other strengths of the Asian companies are already global best practices (such as using standard designs for a number of facilities and processing different project components at the same time rather than in sequence), though Asians may push them further. The rest are innovative practices that break with the conventional wisdom of many Western companies.

Set aggressive goals

When most companies start projects, their in-house teams and consultants typically recommend safe and realistic targets for costs, quality, and execution times. These targets typically include a number of buffers to offset potential delays in the availability of personnel, equipment, and resources. While that approach may seem reasonable, it also increases costs and creates expectations of and tolerance for delays.

In contrast, best-in-class Asian CEOs typically set high, even unrealistic, targets for project teams, making explicit trade-offs between time and cost (Exhibit 1). In practice, that means overinvesting in equipment and labor, which form a relatively small part—typically, 2 to 3 percent of overall project cost. This approach can greatly expedite construction by allowing companies to work on a number of projects simultaneously, preventing downtime when equipment breaks, and encouraging healthy competition among teams. The value of completing projects more quickly usually more than compensates for the incremental cost of the additional workers needed to do so. In this way, a leading Indian power company is on track to complete its world-class thermal-power plant in three and half years rather than the five such projects usually take. A top Asian metal company, which reduced its production costs by about 20 percent in four years, is now the world’s third-largest base metal producer, moving steadily to create a capacity that will make it the second-largest base metal producer by 2010.

Despite the pace of construction, the Asian refineries we reviewed had adopted health, safety, and environmental performance standards similar to those of refineries in the developed world and only marginally lower labor standards, with few exceptions. The refinery design and operational performance were also comparable, though their environmental performance was lower, a reflection of looser local regulations.

Invest broadly

Many global companies outsource almost everything related to the building of any large project, reducing their role to awarding contracts and setting cost and time targets. This approach lets them maintain fewer in-house capabilities but also limits their control over the execution of projects, as well as their ability to address changing circumstances (such as regulations or market conditions) flexibly and to ascertain a project’s status.

By contrast, Asia’s best players regard project management as a core competence. They may outsource various parts of a project but retain an active role as its overall integrator and manager. Moreover, they rarely hand out lump-sum turnkey contracts that award all engineering, procurement, and construction work for a whole project to a single contractor. Instead, they adopt a hybrid approach, managing the most critical parts themselves and outsourcing only standard equipment on a turnkey basis.

The best Asian companies therefore invest heavily to build in-house project-management capabilities. In one extreme example, an Asian oil company employs a massive team of 7,500 engineers who support day-to-day operations and can also be drafted to work on future projects. Since experienced engineers are virtually impossible to find in such large numbers, the company has no choice but to hire many recent graduates and to develop their skills by giving them active coaching from veteran managers.

Not every company can go to such extremes in its home market; that depends on labor costs and the availability of the necessary expertise. Yet most companies won’t need to do so. In our experience, for a typical billion-dollar project, they can extract most of this system’s benefits with only 15 to 30 skilled managers. The investment is small compared with the value at stake.

The companies we studied not only build their internal capabilities but also take steps to prevent suppliers from falling behind schedule. Less effective managers of capital projects typically rely on monthly status reports from contractors, high-level communications between CEOs, and occasional visits to sites; otherwise, the principals have little contact with the process or the professionals working on projects. Best-in-class Asian companies, by contrast, spend significant time and energy upfront, during the contracting stage, to minimize the cost of interaction with vendors from contracting to execution. A major Indian power company, for example, gives them only input, output, and technology specifications, allowing them to develop the details of the design and to suggest design options. Another player, after having done the negotiation ground work, managed to close the negotiation for all the bid bundles with selected vendors in three days flat.

Other best-practice Asian companies continually look ahead for potential difficulties, treat a vendor’s problems as their problems, and commit their own resources to achieve a resolution. A top Asian metals company, for instance, has a large team of 30 to 40 procurement expeditors working directly with many key vendors. This team, looking for ways to improve their processes, monitors their orders and the fabrication status of the equipment they build.

Reconsider low-cost suppliers

While many companies extol the advantages of purchasing supplies from low-cost countries like China and India, they typically do so only for noncritical items—for instance, low-pressure pumps used in refineries; simple fabricated structures, such as trusses for buildings; and peripheral items, such as elevators and fire protection systems. These companies aim to avoid the risk of using unfamiliar vendors for critical equipment, which they source from their existing networks of approved suppliers.

By contrast, Asia’s leading capital project managers obtain lower costs and faster service by aggressively sourcing even critical equipment from promising vendors that have developed strong capabilities and reputations in their home countries but that may lack extensive experience in global markets. A leading Asian metals company, for instance, eliminated 40 percent of its overall project cost by procuring more than 60 percent of its requirements, including the equipment for an entire power plant, through low-cost Chinese engineers (Exhibit 2).

To mitigate the risk that a vendor in a low-cost country might have limited knowledge of the importing country’s regulations, labor conditions, or safety standards, leading Asian companies deploy their own experienced engineers and technicians to oversee the erection and commissioning activities that such vendors undertake. They also invest in programs to strengthen the technical and execution capabilities of these contractors and suppliers.

Avoid gold plating

Less effective managers of capital projects seldom question the rationale for many of the specifications and redundancies in the materials, supplies, and equipment they procure. As a result, overengineering and excessive redundancies often add considerably to a project’s cost. But the Asian companies we studied believe in challenging all assumptions and in understanding the reasons for designs and specifications by subjecting them to the rigorous and systematic tests of value engineering—the organized application of technical knowledge to find and eliminate unnecessary costs. Using that approach, a major Indian engineering, procurement, and construction player aims to reduce the cost of developing and building the equipment it supplies by 10 to 15 percent. Similarly, a national oil company pushed the cost of its pipelines 60 percent below global benchmarks by redesigning their specifications to eliminate overengineering (Exhibit 3).

Flatten the organization

While the concept of flat organizational structures is not unfamiliar, in practice its use reflects managerial preferences or organizational history rather than necessity. Moreover, Western companies tend to have cumbersome and bureaucratic procedures and systems that reduce the speed of decision making.

But the companies we investigated for this study think that the intense, fast-paced nature of capital projects makes a flat organizational structure essential. Such a project-management organization typically has just two layers between the line staff and the project managers, who report directly to the CEO or a board member. While the CEO is involved in all critical discussions, project managers have full authority to supervise support functions and manage resources and as a result can make quick decisions themselves—unless the budget is threatened. Decisions are reviewed as they are made, so the review doesn’t delay decision making.

Clear processes and strong incentives that encourage construction teams to meet project deadlines support this structure—a necessity given the aggressive performance expectations and stretch targets of these companies and their intense scrutiny of the process. To ensure success, they use detailed planning and motivational tactics: activities are planned down to the microlevel (for example, day-to-day delivery plan for each vendor), and the planning function ensures that all project teams stick to the plan and report any deviations from it. Detailed instructions cascade down to specific individuals, who have clear targets and responsibilities. Project managers, for example, must take charge of a project from start to finish, coordinate their work with the line functions, and minimize capital expenditures. Less effective managers of capital projects prepare only high-level schedules, and though project managers are responsible for end-to-end project delivery, they are not responsible for minimizing capital expenditures.

To motivate people, the companies we studied use carrots and sticks. The CEO conducts weekly reviews with all functional heads to monitor costs and adherence to timelines. Managers conduct weekly or even daily reviews of their subordinates. Employees are evaluated on clear and simple performance metrics, of which the most common is spending per day at the project level, which is then broken down to individual managers. Project managers are assessed by several criteria, each weighted by its importance at different stages of a project, including speed and energy (20 percent), willingness to learn (20 percent), and openness (10 percent). Employees may be fired or moved to noncritical positions for failing to meet targets, but those who do meet them receive significant benefits. A leading oil company, for example, offers a 15 to 20 percent increase in the annual compensation of the members of project teams for every month gained during project execution.

Leading Asian companies are creating a significant competitive advantage for themselves by using these best practices. A company that carefully adapts them can improve the return on capital for its own new projects—and compete more successfully against the top Asian performers.