What is required to develop a Business Case for Industrial Modularization
The future of capital project execution for the heavy industrial sector includes the implementation of modularization methods. The benefits of a modular execution and design strategy are well known and communicated within the industry. However, owners, engineers and constructors may not necessarily understand how to develop a business case which supports the use of industrial modularization and the proven benefits on their projects. This blog will discuss the requirements that companies will need to develop an effective modularization business case that will compliment the overall project business case.
Modularization is an execution strategy that has been gaining acceptance across industries in countries that historically assumed there were no cost benefits. Companies are now implementing modularization on projects not only just for the reduced capitals costs but to also take advantage of the many other benefits modularization can bring to a project or program.
In order to develop an effective business case, the first step is to fully understand the benefits a modular execution and design can bring to your project. The following is an overview of the benefits that a modular execution and design can bring to a project:
- Reduced capital costs
- Improved labour productivity
- Higher overall quality
- Improved safety performance including maintaining worker health post pandemic
- Improved construction schedule performance
- Other benefits
- Less environment and socioeconomic impacts (due to reduced plot area and site labour)
- Facility standardization opportunities
The timing of when you perform a business case analysis for modularization is extremely important. Since a modular execution and design has many early planning requirements that include advanced work packaging, module sequencing and the path of construction to ensure the success of a modular project, the decision to modularize needs to be performed as early in the project lifecycle as possible. The business case analysis will need to be performed in order to make the decision to modularize and should be completed in the opportunity and framing phase of a project. If the decision to modularize is made later in a project lifecycle, it will reduce the amount of modularization opportunities and benefits the project will realize.
In order to perform an effective modularization business case analysis, you will need to develop the following elements:
- Define the modularization business drivers
- Define the modularization concept
- Perform a cost analysis
- Perform a risk analysis
Define Modularization Business Drivers
After understanding the benefits that an effective modular execution and design can bring to a project or program, it is easier to understand the modularization business drivers. Understanding and aligning on the modularization business drivers at the beginning of the project and throughout the project life cycle with the stakeholders is extremely important for the success of the project and ensuring an effective decision to modularize. The following list are proven business drivers that should be considered when developing a modularization business case:
- Improved project overall rate of return
- Lower total installed costs (TIC)
- Overall cost and schedule certainty
- Reduced labour risk due to:
- low productivity
- environmental and health issues
- Improved construction schedule
- Improved safety performance including maintain worker health post pandemic
- Improved quality performance
- Plot size reduction with less key quantities (excluding steel)
- Reducing the environmental and/or socioeconomic impact based on reduced plot area and site labour
- Implementation of facility standardization
The main business drivers to modularize should be defined and included as part of the business case to modularize. The business drivers will need alignment with all stakeholders and the project team at the beginning of each phase and throughout the lifecycle of project.
Define Modularization Concept
The modularization concept needs to be defined on what and how much can be modularized for the project based on specific project factors. To assist developing the module concept the following factors will need to be defined:
- Module Yard Locations
- Transportation and logistics considerations and constraints
- Technical considerations and constraints
- Site data and characteristics
Module Yard Locations
There will need to be a high-level analysis of what modular yard contractors and the location (local or international) for the project. When analysing the module yards contractors, you will want to consider the labor cost and productivity, load out capabilities, quality and safety performance, fabrication and assembly capabilities and space available, material management capability, and overall management capabilities.
Transportation and Logistics Considerations and Constraints
Once the module yard locations are defined, the preliminary transportation route with options can be identified including the optimal project site location. Once this is completed, a preliminary module envelope size can be determined based on any transportation and logistics constraints along the high-level routes. Some transportation constraints include bridges and overhead power lines but can include more depending if the site location is inland or by water. At this stage there will be a couple of route options and the final choice may impact the amount of modularization that can be obtained on the project and the final site location for the project.
Technical Considerations and Constraints
Each project and / or owner may have some technical constraints that could impact the amount of modularization that can be implemented on a project. These technical constraints are typically found in specifications that are not adapted to a modular project. Some technical constraints include locating dynamic machinery on modules, the use of centralized electrical and controls and locating air coolers on above other equipment on modules.
Even though these may be considered a constraint, they can be removed by working with the customer on updating the owner’s specification to adapt to modular projects or developing a technical deviation for the impacted specifications. Realizing these technical constraints early on in the project lifecycle will allow the project to develop a plan on how to remove them to allow a more optimal modular design and realize more benefits.
Other technical constraints may be include working in an existing facility and the project will need to review if make senses to use a modular execution and design. In most cases, projects will be able to implement some amount of modularization, even in brownfield or revamp projects.
Site Data and Characteristics
Typically, the main driver to modularize for a project is to improve labor productivity. In order to fully support the business case and to be able to make a decision to modularize, the following elements will need to be documented regarding the site data:
- Site labour productivity and rates
- Local labour availability including the quality of the labour
- Environmental (weather) constraints
- Laydown area availability
- Site access for module transport
- Space constraints
- Other site constraints
Modular execution requires access to the site from land and/or water to support the transport of modules from the module yard to the site. Understanding site access is critical in order to determine the degree of modularization that can be supported. Other elements may provide both hard (cost, schedule, etc.) and soft drivers (safety, quality, etc.) on why a project may want to modularize. These elements will also impact what and how much a project can modularize and should be documented as part of the module concept.
Perform a Cost Analysis
In the current market, capital or total installed cost (TIC) of a project is driving most commercial business models. Understanding the benefits that a modular execution can deliver and how this type of execution will support the business case is important. In order to support the business case an cost analysis should be performed to justify why a project would want to incorporated modularization into their projects. An effective way to provide an cost analysis is to compare a modular project to a traditional stick-built project to show the overall capital savings. In order to perform an effective cost analysis, the following factors or inputs will need to be defined:
- Historical stick-built traditional project TIC for a similar scope
- Percentage of modularization based on the module concept
- Labour rates and productivity at the site and the module yard
- Schedule impact (typically a positive impact)
- Additional engineering, procurement and project management effort
- Additional structural material costs
- Additional transportation and logistics and module off-loading facility costs
- Material cost reduction based on key quantity reduction for an optimal modular layout
- Any import taxes, duties or tariffs
Once you have all the positive and negative inputs you can generate an overall cost savings compared to a traditional stick-built project. DyCat Solutions developed Class V and Class IV estimating tools to assist with performing a cost analysis to support the business case and the modularization decision making.
The Class V estimating tool has historical metrics based on experience and addresses the cost differences from a modular execution and applies the principles from the CII Business Case Analysis Tool that provides a cost analysis. It provides a means to evaluate the actual cost impact of modular decisions and can be used to provide a confidence factor.
The Class IV estimating tool is an equipment factored estimate that uses experience and historical data to generate cost savings when compared to a traditional stick-built project. The approach used to generate the estimate is to first develop a Direct Field Cost (DFC) estimate for a traditional stick-built execution where most of the construction activities take place at the site location. The stick-built execution is then converted to a modular execution by adjusting the stick-built estimate to reflect the expected level of modularization.
Both of these tools can assist the project team in determining a decision to modularize.
Perform a Risk Analysis
Modular execution will reduce site construction labour risks by moving the field labour from site to an offsite controlled location such as a module yard. As modular execution reduces the construction risk, it also introduces some new risks. Understanding the modular risks and developing successful mitigation strategies is very important to the success of a modular project. The following are some examples of the new modular execution and design risks that can develop on a project and will need to be eliminated or mitigated:
- Module shipped incomplete causing unplanned site work
- Engineering deliverables issue late causing a delay in the module schedule
- Vendor data not available causing an incomplete module design
- Late material or equipment to the module yard causing a schedule delay
- Modules shipped in the wrong sequence causing unplanned site work
Any new risks will need to be identified early in the project lifecycle and ensure there is a risk management and mitigation plan in place. The risk management plan should be review as part of the overall modularization business case in conjunction with the technical considerations and constraints, module concept and cost analysis.
In conclusion, to effectively develop a business case for modularization your will need to understand and align on the projects modularization business drivers that support the business case, understand the technical considerations and constraints that may impact how much modularization you can incorporate on your project, develop the module concept and perform both a cost and risk analysis. Once these elements are defined, there will be sufficient data to decide what level of modularization is justified for your project and provide a business case for modularization to executive management.
If you want to know more about modularization, our cost analysis tools or how to effectively develop a business case for modularization for your project, contact DyCat Solutions at firstname.lastname@example.org or visit our website at www.dycatsolutions.com.
Construction Industry Institute (CII) Best Practices and Knowledge Base (https://www.construction-institute.org/)