Companies in the business of building large capital projects—power stations, chemicals plants, oil rigs, amusement parks, and the like—have long faced a quandary. The scale and highly specialized nature of such undertakings might seem to require heavily engineered custom treatment. Yet that approach, to the dismay of the contractor’s shareholders, depends on large amounts of the contractor’s capital.

Chemicals companies, for instance, produce their chemicals and gases in different volumes and proportions, and the capacities of their plants must correspond to the market’s demand for these substances. Any builder of such plants wants to put them up as simply, quickly, and cheaply as possible, but the obvious way of doing so—using standardized parts, designs, and construction techniques—ignores variations in the needs of the purchasers. Is there any way to satisfy the relatively few (but individually significant) customers for the plants while containing capital expenditures, often the biggest item on a builder’s balance sheet?

One manufacturer of chemicals plants has found a way to meet both sets of demands—and thus to create considerable value. It has done so by defying the instincts of many of its own engineers and borrowing a number of principles from a very different operating environment: mass production. Volkswagen, for example, produces noticeably different models (the New Beetle, the Golf, and the Audi TT) but uses the platform approach with standard models and components, thus achieving economies of scale. Likewise, Sony has produced more than 300 variants of its Walkman, all on a platform of standard motors, batteries, and assembly processes.

Applying that approach to low-volume capital projects might seem fantastic. Our manufacturer of chemicals plants, for example, generally builds five to seven projects a year, usually with different outputs and sometimes on different continents. In a decade, a petroleum company might build just half a dozen oil rigs, each tailored to an oil field of unique size and chemical composition and each overseen by a separate project team that explores and develops the reserve and establishes the size and design of the oil rig for that particular field. Teams sometimes choose the contractor.

Yet "platforming" principles are being applied successfully even here. The companies involved treat a series of projects—sometimes lasting for five or ten years—as a portfolio, not as a series of individual schemes. The resulting shortened lead times, smaller inventories, and lower engineering, operating, and maintenance expenses are cutting the cost of the projects by as much as 30 percent, representing, in some cases, hundreds of millions of dollars. Furthermore, the uniform interfaces presented to operators promote safety by minimizing the risk of confusion.

Trading precision for strategic freedom

Of course, platformed oil rigs, chemicals plants, and amusement parks are less finely tuned to a customer’s requirements than a one-off model. But they improve efficiency in many ways. Since they embody lessons drawn directly from previous projects, they take less time to design. Companies can reap economies of scale by purchasing larger lot sizes of parts and materials, in fewer separate transactions, for projects that go up at roughly the same time. Fabrication is faster and less wasteful. And testing and certification are easier to perform. Indeed, a common design can halve the time and effort needed to design and build just about everything—except the platform itself, which must be made adaptable to a host of different circumstances (Exhibit 1).

Far from degrading a project’s value, these savings often permit a developer to enhance it. One developer designed a single sophisticated—but standardized—motion system for the different attractions at all of its theme parks. The time and money saved by designing one system rather than many were used to create a unique theme for each attraction.

Platforming offers other advantages as well. The manufacturer of chemicals plants used to build custom designs, each with a specific output capacity. It now offers a series of standard plants whose output can be scaled up or down. Under the new system, a customer requiring a plant that can produce 2.5 million cubic feet of gas daily might be able to afford one capable of producing 3 million cubic feet—and of becoming operational in 50 or 60 percent of the time needed to construct its custom-built counterpart. Faster construction gives companies greater strategic freedom. A petroleum company that commissions a number of oil rigs with the same basic architecture, for example, can begin to have them built even before it has finished exploration. It can thus respond more quickly to an upturn in oil prices.

Moreover, the shorter the interval between the beginning and end of construction, the less conjectural a company’s projected capacity requirements will probably be. In cyclical industries in which supply, demand, and market prices fluctuate widely, the risk of getting estimates wrong is high, and it is even higher in exploration-based industries such as mining. Platforming makes it possible for companies not only to reach the market more quickly but also to adjust the scale of projects as they go up.

Designing and building the platform

Of course, platforming isn’t appropriate for every kind of capital project. Its applicability depends on how many common elements can be identified in a series of projects and the probable impact on costs, risk, and time to market. One company, whose ten-year capital investment plans were based on its projections of the plant capacity it would require, concluded that platforming could reduce its costs by 10 to 15 percent (Exhibit 2). A feasibility study of this kind can be completed within weeks.

Once a company decides that a platform may be worthwhile, it must work out some basic design principles. The decision to give a car a front- or rear-wheel drive, for example, dictates the physical construction of the vehicle and the parts required to build it. One-size-fits-all solutions won’t do: 15 years ago, for instance, General Motors built many of its Buicks, Cadillacs, Chevrolets, Oldsmobiles, and Pontiacs on common underpinnings (or platforms) to reduce costs by sharing parts, but GM failed to distinguish the individual models sufficiently to justify the price differentials among them. Flexibility can be even more important in capital projects, whose specifications can change during construction in response to shifts in market demand or the availability of resources.

Standardized plant layouts, even with different capacity levels, help operators get up to speed on new projects quickly and easily

Consider again the case of the manufacturer of chemicals plants. Their standardized layout, even with different capacity levels, helps experienced operators and maintenance personnel get up to speed on new projects quickly. Uniformity in component design and materials, meanwhile, helps ensure that plants located anywhere in the world are uniformly sound, despite local differences in skills and in the availability of equipment.

To promote these goals, the manufacturer has designed two kinds of module, both capable of being plugged in to the common platform, much as memory is added to computers. "Repetitive" modules have the same size and specifications, and they can be grouped together in varying numbers; "scalable" modules have common designs that come in different sizes.

One of the company’s repetitive modules is a heat exchanger, which functions in a plant’s cooling system rather like the radiator in an automobile. Because the company can install one or any number of identical modules, it succeeded, for example, in using two of them to meet the cooling requirements of a particular plant instead of custom-building a single larger module, as it would have done in the past. Although the plant built in this way had 10 to 20 percent more capacity than a custom-built plant would have, the design and testing effort eliminated by using standard units more than offset the extra cost.

Repetitive modules can be applied to portfolios of idiosyncratic projects in very different industries. Companies in the petroleum industry, for example, once thought they had to custom-build the hulls that keep their oil rigs afloat, since each is a different size. But these companies now order and assemble repetitive flotation modules according to the buoyancy requirements of individual rigs. Construction can start before exploration is completed and before the petroleum company makes the final decisions about the rig’s capacity or location.

Scalable modules are more complicated. A chemicals plant’s distillation towers, for example, must operate under different pressures and therefore have to be constructed to different specifications as to heights, diameters, and tubing thicknesses. As a result, these towers can’t be assembled from standard, repetitive modules without sacrificing production efficiency. The solution has been to develop a standard design that can easily be scaled up or down. Even though towers must be made one by one, money and time can be saved on design and engineering.

Often, scalable modules are intended to accommodate varying numbers of repetitive modules. The oil rig hull mentioned earlier is a scalable module using a common cylindrical design that varies in size. Upon this hull, the company stacks a series of modules, such as the power plant and the accommodations modules. The oil rig’s galley, hospital, and recreation room are scalable modules; repetitive modules are used for the crew’s quarters, bunkrooms, and offices, which are identical (Exhibit 3). The size of the power systems of the crew’s quarters can vary because those systems are configured from standard, repetitive components such as turbines and compressors.

Modularization makes it possible for companies to cut their engineering and manufacturing costs, to simplify their outsourcing arrangements, and to eliminate redundant work processes and certification requirements. One designer of large capital machines reduced its manufacturing costs by 20 percent and its engineering costs by 40 percent when it shifted from job shop manufacturing processes to high-volume modularized ones.

Organizing the platform

Typically, senior management starts to focus on capital projects only when they are late or go over budget. Leaders of companies that use platforms successfully, by contrast, focus on the early stages of platform design for a portfolio of projects, and they develop the sort of organization that can capture the greatest possible value from the platform.

It is easy to get things wrong. One company identified opportunities to standardize elements of a $1 billion project at a number of sites and thus to cut costs and construction time and to improve operations and maintenance. In view of the overall project’s size and the unique attributes of the separate sites, each construction job had its own project team. There was little central coordination among them, and ultimately their design choices diverged so much that the company had to scuttle the standardization plan. As often happens, the engineers resisted solutions that weren’t optimal (and thus unique) for each job.

To avoid this problem, a cross-project team that enforces common designs—unless there is a convincing case for deviating from them—must oversee the project teams. The cross-project team should lead the project teams through a series of design choices, facilitating the flow of knowledge and best practice to the project teams, keeping a record of what was transmitted successfully, and coordinating and managing relationships with key contractors.

One petroleum company, for instance, appointed a highly respected business manager who had a technical background to head its standardization team. His role was not to second-guess the project team leaders but to come up with design ideas and to estimate their benefits. To promote standardization and to strengthen his own position, he made sure that senior people from each project were closely involved in the standardization team’s work.

It is important to recognize the potential for conflict by defining roles clearly and establishing processes for resolving disputes before the design phase starts. The standardization leader at one company complained, "Months into the project, we’re still looking for a way to resolve issues and move forward. As new project managers come on board, we have to start again at first principles."

Getting contracting right

Most companies that build large capital projects rely on contractors to do much of the work. Companies that experiment with platforming must get along well with contractors, because to make this approach work, a series of narrowly focused, project-based relationships with them must be replaced by relationships extending across an entire portfolio.

Platforming, moreover, can create value for the contractor as well as the client. The scalability of the design of the chemicals company’s distillation towers gave the fabricator an opportunity to increase its labor productivity, to use its assets more efficiently, and to simplify its engineering processes. Indeed, before a client company signs construction contracts, it should identify the source of a project’s economies, so that they don’t flow mainly to the contractor. Yet the client must also offer the contractor incentives to operate efficiently. The chemicals plant company, for example, rewarded the fabricator of the towers for beating mutually agreed cost targets at various milestones in the project. As each stage was completed, the contractor’s incentives rose.

Of course, it is essential to monitor the progress of projects and the compliance of builders with the terms of the contracts they sign. One way of ensuring compliance is to schedule each payout for the completion of a discrete phase of a project instead of paying the whole amount in a lump sum.

By managing projects as a portfolio—creating a solid platforming plan and strong organizational and contractor systems—the builders of capital projects can look forward to benefits formerly available only to mass manufacturers.