Breaking the cycle: getting major projects back on track
The official review of the proposed HS2 project leaked to the Financial Times in January 2020 put the latest cost estimate at £106 billion. The cost stated in the 2015 budget was just under £56 billion. This is not an isolated example.
A review of some 318 megaprojects (generally projects above $1 billion) in 2011 showed that the vast majority failed in terms of programme and budget compliance.
Why do major projects become overdue and consequently overspend? Given their scale there are often many reasons but a few are highlighted below along with suggestions for a contractual approach.
Firstly, and obviously, major infrastructure projects are complex. There is land to acquire, planning and regulatory hurdles to overcome, financing difficulties and many parties, often with long supply chains, to engage. In the face of these uncertainties it is often difficult to bring design to a sufficient maturity to forecast accurately.
Without making assertions on any particular project, research over the last two decades has confirmed suspicions of psychological explanations or misrepresentation for political or economic reasons as a factor in the underestimation of costs. Whether this is strategic overestimation of benefits or underestimation of risks in the face of competition for access to funding or optimism bias flying in the face of experience; the result of an inaccurate forecast is the same.
Lack of real time information
Poor procurement structures with insufficient attention to front end loading or clarity of areas of interface between designers and contractors are also evident in case studies of project failure. In the nuclear sector there are recent examples of poor contract and programme management where a lack of project management integration, programmes which do not reflect the actual circumstances of the project, parties operating on the basis of differing schedules with cost and programme information not being updated in real time have been highlighted.
Many of us will have seen this latter point of weak control of progress, a failure of the parties to update a programme despite the advances project management technology. In the event of a dispute, this will mean huge expenditure on lawyers and cost consultants presenting bundles of records and differing versions of a Gantt Chart impacted by variations, delays, late design approval, weather issues.
Front end design, modularisation, off site-fabrication, co-siting and economies of multiples should all be considered as approaches to tame project overspend but, also should the following basic procurement and contractual issues:
- Above all, the employer must be fully engaged in project management on major projects, either through in-house capability or through a properly authorised project management organisation, and the contracting structure should, where required, allow greater control by the employer.
- Using standardised contractual formats, such as NEC4, through the supply chain should be used to facilitate coherent management.
- There should be consideration of foreseen risks and problems with appropriate management of both parties meeting to discuss the issues and share relevant information.
- A realistic, up to date plan for the project should be communicated regularly. The programme should be adjusted in response to new decisions taken.
- The boundaries of responsibility should be contractually clear and if necessary, an interface agreement may be required to set these out in a multiparty context.
- The procurement structure should ensure that the contractors are motivated. Contractually incentivising contractors is often difficult as incentive contracts will require a reasonable degree of specification.
- Provision for cost recovery should be allowed where the risks are high.
- There should be early clarity in the contracting strategy but as the risks change it may be desirable to change the type of contract.
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