Discipline and Validated Data to Avoid Project Cost-Overruns and Delays

With the increasing occurrence of delays and cost overruns in global infrastructure projects, the infrastructure sector must better understand – and address – the risks inherent in program delivery so as to earn public and investor confidence.

To do so, we must increase our ability to identify and manage the many ‘hard’ and ‘soft’ factors that impact project success, and apply disciplined, data-driven and evidence-based approaches to increase the likelihood of success in delivering major projects.

Compounding consequences of delays and cost over-runs:

It’s hard to ignore the mounting evidence of delays and cost overruns in many high-profile infrastructure projects globally. Here in Australia, recent challenges faced by many infrastructure projects within the Transport and Energy Natural Resources (ENR) sectors are compounded by the collapse of a number of major construction firms. We see similar cases around the world.

Together, these events are placing enormous pressure on the industry to reassure the public that the profession and market can deliver these projects successfully.

The recent Risk Engineering and Project Controls Conference, 15-17 May 2019 at ICC, Sydney – organised by EA, RES, ACES, and AACEi – was a great opportunity for our 300 delegates to share experiences and lessons learned across the world.

To help organizations more fully quantify the possible time and cost consequences of these delays, and recognize their overall risk exposure in delivering major infrastructure projects, the Risk Engineering Society (RES) has published the 2nd Edition of Contingency Guideline. The Guideline defines commonly-bandied terms such as ‘cost overrun’ and ‘schedule delay’ and details their impacts.

If you would like a complimentary copy, please send me an email to: [email protected]

For example, when available funds are limited, over-budget projects have the potential to cause other projects to run over time or be cancelled altogether. This could adversely affect multiple project budgets and make it difficult to obtain funding for future ventures. In contrast, over-estimated projects will lock up capital and may result in under-investment. Similarly, schedule delay – or slip – cause cost increases, due to penalty clauses, time and effort, escalation, or a combination of these factors.

Refining contingency planning:

Despite decades of international studies and efforts to predict and/or reduce project cost overruns or schedule delays, including Castle’s 1985 study of 17 mining projects, major infrastructure projects around the world continue to be significantly affected.

For that reason, the RES’ Contingency Guideline set out to help reach consensus on the methods for contingency determination across industry and government, including comprehensive information on principles and practice methods. The report points out that most current, recommended practices only focus on ‘contingency determination’ for cost estimation purposes. The RES aims to provide practical details on other key project planning aspects including ‘allocation’, ‘control’ and ‘program contingency.’

Charting root causes of project challenges:

We usually can group the key factors that contribute to cost overruns and/or schedule delays into two categories: hard and soft factors. Hard factors can include issues such as scope variations and technical problems, while soft factors include cognitive biases, strategic misrepresentation and organizational culture. For example, these include optimistic single value estimates and timelines or pressure to meet predetermined targets due to technical, political, social or other objectives.

 It’s noteworthy that most of these issues are preventable by using an appropriate contingency determination approach. In the coming years, infrastructure authorities will enjoy many opportunities to do so as a result of more evidence-based asset management planning and prioritization. By leveraging new risk-based data-driven models, we can improve the way we prioritize, develop, deliver and maintain the infrastructure.    

Indeed, these practices could become critical as major infrastructure projects become larger and more complex. As we’ve seen in the last few years, bigger projects continue to face issues related to the politicization, multidisciplinary collaboration, market capacities and competencies, and capability, particularly at the management level. In this environment, we expect that infrastructure authorities and project owners will desire data-driven benchmarking, risk-based cost and schedule estimation, and learning lessons from successful and failed projects globally.   

Applying all disciplines to drive schedule and cost control:

Our experience on the engineering, procurement and construction of major infrastructure projects, has showed us that while doing the basics well is definitely essential, it is not enough to address the challenges in developing and delivering major projects. Consistent, effective and efficient engineering approaches to uncertainty and risk assessment help businesses to better understand and quantify the range of possible consequences and the organization’s overall risk exposure. 

It’s also important to appreciate that successful infrastructure project delivery requires a wide range of functioning disciplines including accountability, culture, system integration and commissioning. By doing so, there are 10 critical insights that can enable the public and private sectors to ‘pick up our game’ in schedule and cost control:

1. Plan and implement a better contingency management across ‘determination’, ‘allocation’ and ‘controls.’ Consider both hard and soft factors contributing to cost overruns or delays.
2. Use a data-driven evidence range rather than a single target date and cost.
3. Assess and set a realistic cost estimate and schedule delivery.
4. Develop and manage an Integrated Master Scheduling (IMS), including all internal and external dependencies by aligning Work Breakdown Structure (WBS) and Cost Breakdown Structure (CBS).
5. Test and validate value for money through benchmarking and risk-based scenario analysis.
6. Undertake a data-driven Quantitative Risk Analysis (QRA) on both schedule and cost estimate.
7. Undertake independent project cost/schedule confidence level, including Schedule Health Check.
8. Monitor the variance between desired contingency and available contingency regularly (recommended quarterly but no later than 6 months intervals).
9. Integrate and align contract administration activities, including change control, with schedule, cost and risk management processes, both qualitatively and quantitatively.
10. Assess and manage cost risk exposure at the portfolio level in addition to individual projects.

Ultimately, we must fully appreciate that the successful delivery of infrastructure projects is not solely dependent on the interaction of human behaviors and organizational culture, in particular around strategic misrepresentation, accountability and transparency. It is equally about good practice processes. Data-driven and evidence-based approaches can help us bridge the gap between these two spheres an constantly challenge ourselves to strive for excellence in project delivery.

Considering many infrastructure projects in the pipeline globally, it is our opportunity (and responsibility!) to raise this profession together and get the trust of public back. Everything can be AWESOME! :)

Your views and comments are welcomed, as always.

The views expressed in this article are those of Pedram Danesh-Mand and do not reflect or represent the official policy, position or recommendation of the KPMG Australia, Engineers Australia (EA) or Risk Engineering Society (RES).