WHY PROJECTS GO WRONG, WHAT CAN WE DO ABOUT IT?
The history of construction is littered with projects that should never have seen the light of day. Ironically, some of them are now regarded as a great success, but for entirely different reasons.
The Sydney Opera House is one example. The Danish architect Jorn Utzon, won a competition in 1957 to design the national opera house. Work began in 1959. The original budget was A$ 7 million with a 4-year construction period.. Utzon resigned in 1966 due to political interference. It was completed in 1973 at a final cost of A$ 103 million and over 10 years late. In 2002, a further A$ 45 million was spent to bring the building more in line with his original concept.
The Boston Big Dig, also known as the central artery/tunnel project, was budgeted at US$ 2, 4 billion and a 6-year construction period. The final cost was around US$ 24,3 billion and it took 16 years to complete. The State still owes $ 9, 3 billion in principal and interest, with re-payments likely to continue until 2038. It is the most expensive highway project in US history.
The French electricity authority, EDF, awarded a contract for the construction of Flamanville 3, a 1 650 MW European Pressurised Nuclear Reactor, one of the first of its kind. Work began on site in September 2007 at a budget of € 3, 3 billion, with a commissioning date sometime in 2012. In July 2018, EDF advised that loading of nuclear fuel will only take place towards the end of 2019 and that the final estimated cost is now € 10, 9 billion.
The estimate for the Channel Tunnel included a generous 10% allowance for the impact of unforeseen circumstances on construction costs. Since the vast majority of risks had been identified the likelihood of expending all of this was low. Construction costs increased from £ 2, 6 billion to £ 4, 65 billion, the 10% contingency was hopelessly inadequate. Tunnelling under water was a significant challenge with varying geological conditions, the only precedent available was the undersea Seikan Tunnel in Japan, opened in 1988.. In 1995, Eurotunnel stopped interest payments on loans and began a 10-year long process of refinancing the project. An analysis done after completion of the project showed the actual net present value to the UK economy to be minus $17,8 billion, and the actual internal rate of return as minus 14,45 percent. The British economy would have been better off had the Tunnel never been constructed.
A survey of 1603 road and rail projects valued between $ 1,5 million – $ 8,5 billion (within a broader sample of 2062 infrastructure projects), completed between 1927 and 2013, across 20 countries, found that, on average, Road projects were 24% over budget and Rail projects 40%.
We do not have the comparable figures for the pyramids at Giza, or the Great Wall of China, but it is safe to assume they did not go entirely as planned. At least, for those working on the pyramids there was a rather unusual completion bonus – being put to death and entombed with the pharaoh!?.
So why do some projects go so wrong?
- Optimism Bias
- There is a tendency for project evaluations to be overly optimistic. This results in an under-estimation of the time, costs and risks to delivery and an over-estimation of the benefits. No Engineer wants to advise the Employer that his project will not fly – he is doing himself out of further business. Similarly, no Employer wants to hear his project is not feasible. He will simply go and find another Engineer who says it will work. Given the competition for scarce resources, the project initiator has a direct interest in understating its risks and cost while over-stating its benefits.
The result mimics the Cinderella story with the Ugly Sister determined to jam her very large foot into a petite glass slipper, thinking it will fit.
On a non-standard civil engineering project optimism bias can lead to a 25% under-estimation of the time required to complete and a 65% under-estimation of the capital cost
- There is a tendency for project evaluations to be overly optimistic. This results in an under-estimation of the time, costs and risks to delivery and an over-estimation of the benefits. No Engineer wants to advise the Employer that his project will not fly – he is doing himself out of further business. Similarly, no Employer wants to hear his project is not feasible. He will simply go and find another Engineer who says it will work. Given the competition for scarce resources, the project initiator has a direct interest in understating its risks and cost while over-stating its benefits.
- Anchoring
- Anchoring occurs where an initial piece of information becomes the basis for subsequent judgments. Once an anchor is “set”, further decisions are made by adjusting away from that anchor. The first budget and programme serve as an anchor for later stage estimates, which never sufficiently adjust to the realities of project performance.
The first number considered a possible answer serves as the anchor. Even when people know the anchor is too high or too low their adjustments away from it are almost always insufficient.
- Anchoring occurs where an initial piece of information becomes the basis for subsequent judgments. Once an anchor is “set”, further decisions are made by adjusting away from that anchor. The first budget and programme serve as an anchor for later stage estimates, which never sufficiently adjust to the realities of project performance.
- The Business Case
- Projects, especially civil engineering projects, do not always get the green light because they make good business sense with an acceptable return on investment. They are often politically driven, or vanity projects, that serve another need. The United States is renowned for its “pork barrel” projects with government funds spent on local projects primarily to bring more money to a specific representative’s district, or to aid re-election.
An Australian study showed that cost overruns were 23% higher on average for projects that received a funding commitment during a state election campaign.
- Projects, especially civil engineering projects, do not always get the green light because they make good business sense with an acceptable return on investment. They are often politically driven, or vanity projects, that serve another need. The United States is renowned for its “pork barrel” projects with government funds spent on local projects primarily to bring more money to a specific representative’s district, or to aid re-election.
- Defending Sunk Costs
- Also known as the point of no return. Too much money and time has already been invested in the project, and this is used to motivate spending more money and time to bring it to fruition. At this point controls are normally discarded in favour of a “complete at any cost” approach, and the project flooded with resources.
- Gaming
- On scrutinising a tender enquiry it becomes obvious that both the budget and the construction period are woefully unrealistic. Rather than qualify his offer and risk being non-compliant, the Contractor commits to a price and a programme knowing they are not achievable, and relying on the Employer and Engineer failing to fulfil their obligations – access to site, timeous flow of information etc. A dangerous game.
- Scope Creep/Uncontrolled Change
- In the past government projects were fully designed and the scope fixed before coming out to tender. The tender drawings became the Issued for Construction (IFC) drawings for the successful contractor.
Due to a variety of reasons, this is no longer the case. “Design as we go” has become the norm. The scope is far from finalised prior to going out to tender, very little, if any, design is complete.
Prime examples of scope creep are the “state of the art” Medupi and Kusile Power Stations. The tender enquiries used Majuba Power Station, completed in April 2001, as the anchor. Although providing these new power stations was a national emergency, Eskom were better served delaying construction until the scope was settled.
Most contractors have systems to record the direct impact of change – extensions of time, disruption and the like. Very few contractors are equipped to record the secondary impact of change – the impact that the change has on work still to be done. This might only be felt weeks or months later.
If the above issues are part of the recipe for a failed project, then what do we need to do to improve the chances of success? In most instances the converse of the above.
- In the past government projects were fully designed and the scope fixed before coming out to tender. The tender drawings became the Issued for Construction (IFC) drawings for the successful contractor.
- Well Defined Scope of Work
- This speaks for itself. A detailed scope of work gives greater certainty to the project outcome for all parties involved. Ideally, design should be frozen at project execution stage, with modifications done after taking over.
- Credible Project Estimate
- Benchmark the project against the actual outcome of a broad reference class of similar projects carried out in the past. The Sydney Opera House, the Channel Tunnel, Flamaville 3, Medupi and Kusile Power Stations are either “once off” or “next generation” projects with nothing comparable. In these instances an optimism bias factor needs to be calculated and applied. It is also important to get an “outside view” from someone without a vested interest.
Early contractor involvement (ECI) in the planning and budgeting will assist in arriving at a credible estimate and a sensible programme. It is at this stage that changes can be made with minimal cost impact. ECI is criticised for its perceived lack of competitiveness. This can be overcome by a prequalification process or a two-stage open book procurement model, amongst others.
- Benchmark the project against the actual outcome of a broad reference class of similar projects carried out in the past. The Sydney Opera House, the Channel Tunnel, Flamaville 3, Medupi and Kusile Power Stations are either “once off” or “next generation” projects with nothing comparable. In these instances an optimism bias factor needs to be calculated and applied. It is also important to get an “outside view” from someone without a vested interest.
- Sensible Planning and Programming
- A project takes as long from conception to award as it does to construct and complete. Take time to plan properly, plan first, programme later. Where design is ongoing, develop design in parallel with cost planning and test against the budget so any changes are brought about prior to construction.
On projects with a construction period greater than a year, avoid providing a detailed programme covering the full duration. Keep the detailed planning to between 3-6 months ahead at best. Too often, we produce detailed programmes with thousands of activities and links that quickly become unmanageable and impossible to use to monitor progress.
Manage time and you manage cost.
- A project takes as long from conception to award as it does to construct and complete. Take time to plan properly, plan first, programme later. Where design is ongoing, develop design in parallel with cost planning and test against the budget so any changes are brought about prior to construction.
- Appropriate Delivery Model and Allocation of Risk
- Current procurement procedures are focused on a “hands off” engagement with bidders that creates a non-collaborative, contract driven, risk dumping, lose-lose relationship, with price the determining factor, not value for money.
Use standard, well-understood Conditions of Contract with minimal, if any, amendments. In my experience, construction contracts follow the 70/30 principle. Seventy percent of the success or failure of a project is determined by the contract you sign. After this all you can influence is the remaining thirty percent.
A Party to a contract should only accept a risk where:
- The risk is within its control.
- It can economically transfer the risk, i.e. insurance.
- The economic benefit of managing the risk lies with that party.
- If the risk eventuates, the loss falls naturally on that party.
The Contractor cannot price an unquantifiable risk within the control of the Employer.
The allocation of risk varies with the selected procurement model. The one extreme is the lump sum turnkey/public private partnership model which allocated virtually all risks to the Contractor, including the accuracy of the Employer’s requirements. The other extreme is “alliancing” where risks are managed by a project team comprising of the Employer, Contractor and Engineer.
- Current procurement procedures are focused on a “hands off” engagement with bidders that creates a non-collaborative, contract driven, risk dumping, lose-lose relationship, with price the determining factor, not value for money.
- Competent Project Teams
- Only place people with the requisite skills, pertinent experience and knowledge in key positions. This applies equally to the Contractor, Engineer and Employer. Avoid the traditional fractured team of Employer, Engineer and Contractor; incentivise everyone to make the project a success.
There needs to be a thorough understanding of each stakeholder’s outcomes for success, with clearly achievable project objectives. Empower the project team to solve problems at the lowest level possible.Good leadership is critical, as is open and honest communication.
In summary:
- Planning Phase
- Commit to a scope, cost and schedule baseline only at proper design maturity, with a validated estimate.
- Include risk analysis and quantification to determine cost and schedule ranges.
- Drive out optimistic assumptions; strive for “most likely” scenarios.
- Utilize external independent reviews and cost estimates.
- Execution Phase
- The Employer must be involved and engaged.
- Only people with requisite skills, pertinent experience and knowledge in key positions.
- Regular project performance reporting – 80/20 principle.
- Periodic external independent reviews.
- Avoid the fractured team.
- Communicate honestly and often.
Norman Milne
- Only place people with the requisite skills, pertinent experience and knowledge in key positions. This applies equally to the Contractor, Engineer and Employer. Avoid the traditional fractured team of Employer, Engineer and Contractor; incentivise everyone to make the project a success.
