How to avoid project blowout
If you look at the portfolio of domestic projects within Australia, whether it be infrastructure, commercial or plant related, you will observe significant cost blowouts in recent years. Australia's LNG industry is a big contributor – Chevron's Gorgon LNG has blown out by a whopping $17 billion to $54B, with Woodside, BG, Santos and ExxonMobil combining for a total for the industry so far of more than $25 billion over budget.
The LNG industry is not alone – take the Sino Iron project by CITIC Pacific Mining (now at $10B and three years late, originally $2.5B), Rio Tinto's Oyu Tolgoi copper-gold project in Mongolia ($1.4B over budget), Gindalbie Metals' Karara iron ore project ($970M over budget), and BHP Billiton's Worsley alumina refinery ($1.3B over budget) provide equally worrying examples.
What are the causes?
Australia's track record with mega-projects is poor – as at 2011, only 1 of 15 mega projects since 2000 was completed on time and on budget. Correctly identifying the scope of work is crucial and for the best chance of success all disciplines must have direct input into the estimate process. Estimating, whilst widely criticised is only one contributing factor. If the sequencing or risks not correctly is not correctly identified, they can seriously affect the project from a very early stage.
Kailash Awati, author of the "Heretic's Guide to Best Practices", identifies six major reasons why project estimates go wrong:
False analogies - It is all too easy to select a project (for a basis of historical pricing) that is superficially similar to the one at hand, but actually differs in critical ways.
False precision - Uncertain quantities should be quantified by a distribution, rather than point values.
Estimation by decree - Schedules are shoe-horned into predetermined timelines, with estimates cooked up by those who have little or no idea of the actual effort involved in doing the work.
Subjectivity - This is where estimates are plucked out of thin air and "justified" based on gut-feel and other subjective notions.
Coordination neglect - Projects consist of diverse tasks that need to be coordinated and integrated carefully, a need which is often underestimated (or even totally overlooked) by project decision makers.
Too coarse-grained - Teams often short-circuit the process of estimating large tasks by attempting to estimate them directly. Such estimates usually turn out to be incorrect because sub-tasks are overlooked. It is true – the devil is always in the details.
What is the solution?
This will be dependent on whether it is client or contractor based, but in general the following should be noted:
Know Your Scope. For the client you want the loosest scope covering the maximum work, whilst as a contractor it needs to be as detailed as possible. Ambiguity is the clients best friend, and age old catch phrase “and any associated items” is the contractor pet hate. This said, it is not unusual for the client to revise the scope after tenders have been submitted, not to mention change the drawings and other supplementary detail provided. It’s a chicken and egg situation the contractor wants to win the job, knowing that they should be able to get variations against poor scope detail. This is easy to say, hard to do. Scope unknowns, variations and re-work must be meticulously captured by the contractor, communicated and priced to avoid being burnt on scope creep due to client rejection through lack of justification.
Know Your Risks. These do not just apply to the activities affecting personnel but also include project delivery risks, such as long lead items, lack of resource etc. It is also important that as the project progresses the risk register is reviewed and updated frequently throughout the project.
Manage your schedule, tightly. This applies to both the client and contractor alike. Delays in items such as technical queries and responses can add a significant amount of time if not managed correctly. Remember delays can be one of the biggest causes of overruns in projects. The client needs to answer the contractor’s questions quickly and clearly to avoid delays. Similarly the contract needs to raise queries/ issues at the earliest opportunity to avoid delays. Know what it costs to maintain the project team on site for a single extra week.
Manage your plant and equipment. This is crucial since idle plant or equipment is reducing productivity v’s cost. This needs to be closely matched to the schedule to group similar activities together to minimise mobilisation / demobilisation costs. It all adds up
Accurate estimates, that include provision for the high risk activities. Estimates that are based on incomplete information have a way of becoming locked in as the basis of a project. Areas of uncertainty must be well defined and highlighted for further work to quantify. The client is more than likely interested in the lowest price, due to the current economic climate. The contractor bids low in order to get the work, hoping that the clients lack of understanding will be sufficient to make up profit margins through variation claims.
Clear communication and direction. If there’s an issue with communication internally or between the client and the contractor, this can be like an iceberg. It might not seem like much on the surface, but when you see how much of is below the surface, you soon realise how dangerous it can be. This is probably the most important factor, when it comes to project execution. If there is good clear communication between all parties project progress will be good even when there are issues. The moment there is a breakdown in communication issues become magnified. Consider all channels – internal, external, top-down, bottom-up and peer-to-peer, client to contractor, contractor to client.
Reporting is critical to accurate progress updates and forecasting. Misleading reports will eventually catch up and will result in tension between the contractor & client. This is unproductive and generates more pressure to make up lost time, taking short cuts and ultimately comprising either safety or quality.
Transparency (selective) follows on from reporting, in so much as that if there is a problem then this is where clear communication and clear direction will compensate for project “oversight”. A good team will always pull together and make things happen. A disjointed team will merely lurch from issue to issue, losing time and money in the process. There may well be issues on both side of the fence, the key is to deal with them as soon as they arise, and when you need help ask for it. Both parties are going for the same goal and want the project to be successful.
Learn from your mistakes. Don’t wait till the end of the project record them as the project progresses, that way if it reoccurs, all the information is there to minimise any impact. Ensure there is a register so that review is easy.
Unfortunately, the last of these seems the one least heeded. The lessons from Australia's record of recent major projects are clear – it is crucial to understand what it is that causes major projects to experience major cost blowouts, and to incorporate these lessons into future projects. Sufficient time and effort must be spent at the initial stages of projects to properly define the scope and produce robust cost estimates and schedules to adequately manage project risk. Otherwise, those executing major projects will continue to ask themselves the age-old question (better known as Meskimen's Law): "Why is there never enough time to do it right, but there's always time to do it over?"
It doesn’t matter the size of the project whether it’s your building your own house or building a large mega project. All that changes is the magnitude of risk. If you put the effort in up front and prepare, the rewards will be collected at the end.
KEY POINTS TO REMEMBER TO AVOID COST & SCHEDULE BLOW OUTS
KNOW YOUR SCOPE
KNOW YOUR RISKS
SET CONTINGENCIES
BEGIN WITH ROBUST ESTIMATES & REFINE TO HIGHLIGHT PROBLEM AREAS
ENGAGE ALL DISCIPLINES IN THE ESTIMATING AND SCHEDULING PROCESS. THE MORE EYES THAT SEE IT THE LOWER THE RISK OF OVERSIGHT.
MANAGE YOUR SCHEDULE
ENSURE ACCURATE REPORTING FROM CONTRACTORS
CLEAR COMMUNICATION
ACCOUNTABILITY FOR RESPONSIBLE PARTIES
LEARN FROM YOUR MISTAKES
Did you manage to deliver on time and on budget with your last project?
