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Analysis:
Analysis

Are semiconductor manufacturers ready to build US fabs successfully?

Strategies to navigate an increasingly challenging environment

Authors: Mike Whalen, Matthew Wolfram, Lance Kefalos

Organizations looking to capitalize on CHIPS Act funding should also be looking to upgrade their construction project delivery capabilities for these multibillion-dollar investments. A recent study of global megaprojects—projects with budgets exceeding $1 billion—showed that nearly two out of three megaprojects fail.1 Additionally, the lack of capacity and experience building fabs in the United States exacerbates the challenge, as about 80% of new fab construction occurred outside the United States over the past 10 years. The good news is these challenges can be addressed and mitigated if managed proactively.

A fit-for-purpose governance and assurance framework for megaprojects

Successful project delivery starts with a well-defined and targeted approach to project governance, communication, and reporting. Megaprojects are inherently complex and require a comprehensive framework for planning, monitoring, and control. For company executives and board members, accurate reporting and forecasting is essential for decision-making and, in the case of megaprojects, paramount to performing their fiduciary duty to investors. Noted below are actions vital to successful governance and assurance—needed to create long-term advantage in the industry.

While most companies’ project governance and assurance frameworks look fine on paper, they do not function well in reality. Inadequate terms of reference result in unclear roles and responsibilities of governance committees and their members. Governance committees “trust” but do not properly “interrogate” project information. Professional skepticism is needed to vet project assumptions and risks properly. Companies should think in terms of five lines of defense as follows:

  1. Project team
    • Owns project risks and risk mitigation
    • Communicates tone for project management that is consistent with the tone from the top
  2. Internal SOX controls
    • Reviews control environment for recording and forecasting costs
    • Reviews accuracy of costs incurred and forecasts for compliance with financial reporting requirements
  3. Internal audit
    • Develops and monitors process and controls related to project delivery
    • Independently evaluates risk
    • Alerts steering committee, executive committee, and board of directors of emerging risks
  4. External project assurance
    • Supplements project team bringing industry perspective to developing and enforcing controls
    • Independently identifies risks and develops mitigation strategies
    • Conduit between project team, internal audit, steering/executive committee, and board of directors to independently communicate status of risks
  5. Board of directors
    • Establishes project objectives
    • Sets priorities which sets the tone throughout the project organization

While many companies rely on well-established processes to review and approve projects, the execution is often flawed, as reviewers lack the objectivity and comprehensiveness to correctly assess project risk profiles. Because of the time, effort, and money expended on the multiyear ramp-up to project approval, and the momentum built during the process, there can be a built-in bias to “make it work,” including flawed risk assessments, aspirational projections designed to meet hurdle rates, and other decision factors that may be unachievable. Independent oversight and reporting to project stakeholders will be vital to timely and correct decision-making as circumstances change.

During design and project execution, project staff and middle management are often the first to discover major project risks; but the company culture of “only good news,” coupled with the optimism bias of project managers, can prevent the risks from being accurately and appropriately reported and thus not fully mitigated. This could result in delayed identification of important problems, potentially compounding their effects. Fit-for-purpose metrics, such as actuals against plan for budget and schedule, and escalation procedures, such as approvals by more senior leaders for large change orders, are critical to successfully recognizing and mitigating risks.

Good governance relies on accurate and timely information to support effective decision-making. Having the right people armed with the right digital tools is crucial to gaining visibility into project performance and informing stakeholders. Cloud-based project management platforms can centralize project documents and data while enabling project team members to collaborate in real time. Teams can leverage data and metrics captured from these platforms for analytics and reporting to project stakeholders. The solutions available to company management and project teams today allow the organization to stay informed and agile and for project staff and middle management to stay focused on day-to-day activities.

Prepare for the risks associated with building new fabs in the United States

As semiconductor companies increase fab construction in the United States, they should expect to face challenges due to a turbulent supply chain and a labor market with limited capacity and expertise. When preparing risk-adjusted budgets, companies should consider these factors:

  • Materials and equipment: Semiconductor companies are competing at both U.S. and global levels for the same supply chain, and material/equipment providers may struggle to keep up. Cost escalation and extended lead times are risks that must be accounted for during the project planning phase.
  • Engineering teams and contractors: There is a small pool of experienced fab designers and contractors in the U.S. Design teams and trade contractors, in particular, may not have the capacity to support the upcoming workload as multiple megaprojects begin. Even when the preferred vendor is selected, it may be difficult to get the "A team." Companies should be exploring various project delivery systems and contracting methods now, as well as options for joint ventures.
  • Internal company resources: With the focus having been on building fabs internationally, semiconductor companies have limited capacity and internal expertise with US fab construction. These companies should extend the owner team with qualified megaproject experts who can assist in selecting the proper project delivery system and contracting strategy to align with owner objectives.
  • Stakeholder coordination: Companies should identify the dependencies between vendors, designers, internal stakeholders, and contractors across design, construction, and tool install. Orchestrating deliverables and timelines is critical to avoid project delays and inefficiency caused by scope gaps or duplication of effort.
  • Skilled labor market: Construction industry leaders in the United States have continually expressed concern with the lack of skilled labor in this generation’s workforce. The scale and specialized nature of fab construction will strain a fragile labor market with limited fab plant experience. Security clearance requirements and federal funding compliance issues could cause additional challenges for the workforce.
  • Prevailing wages: Labor costs could also be impacted by the Department of Labor’s proposal to revise the definition and process for determining prevailing wages covered under the Davis-Bacon Act.2 Minimum wage for construction workers is likely to increase if the proposal is approved.
  • Compliance with the CHIPS Act: Projects receiving CHIPS Act funding will be required to invest in small businesses and disadvantaged communities during construction and into operations. Additionally, projects may be subject to enhanced environmental standards and other company-driven environmental, social, and governance (ESG) imperatives. Companies will need to develop plans to comply with funding requirements including considerations around how to invest in skill development for the local workforce. When selecting a project location, companies should also make sure that local and state requirements are met.

Leverage modular design and offsite manufacturing to hedge labor risk and improve speed to market

In recent years, contractors in the United States have increased off-site manufacturing (OSM) efforts to improve project schedules and reduce labor costs by 20% compared to traditional field installation.3 The oil and gas industry has relied heavily on modularization for decades, and the semiconductor industry should look to do the same. OSM strategies must be contemplated at the earliest stages of project planning to maximize opportunities for modularization, scalability, and repeatability. When evaluating OSM options and trade-offs, companies should consider the impact to both the project (cost, schedule, quality, and safety) and the business (speed to market).

How we can help

Deloitte has widespread industry experience helping leading global companies successfully deliver their most complex mission-critical megaprojects and build sustained advantage. We have also helped companies get their troubled projects back on track through a targeted approach to transformation. As we work across numerous industries and asset classes, we constantly develop new and unique insights to improve megaproject performance, bringing these insights to our clients every day to help them enhance the delivery of their most important capital projects—and create new possibilities.

Endnotes

1Ed Merrow, Industrial Megaprojects (Hoboken, NJ: Wiley, 2011).
2US Department of Labor, “Updating the Davis-Bacon and Related Acts Regulations,” accessed October 31, 2022.
3Chris Hermreck, “Offsite Manufacturing (OSM) supports semiconductor’s fast-paced projects,” JE Dunn, 2020.

Explore all articles in our Expanding Semiconductor Manufacturing Series

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Brandon Kulik

Brandon Kulik

Principal | Deloitte Consulting LLP
+1 714 436 7530
Christie Simons

Christie Simons

Global Semiconductor Center of Excellence Leader | US A&A TMT Leader | Audit & Assurance Partner
+1 415 783 4777
Mike Whalen

Mike Whalen

Managing Director | DTBA LLP
+1 214 840 1461