WHAT GOES WRONG ON COMPLEX PROJECTS? - RSM UK

WHAT GOES WRONG ON COMPLEX PROJECTS?

A fresh look

Contents

Why do so many complex projects fail to deliver? 3

1. Get the commercial governance and planning right from the start 4

2. Have you given risk to the right person? 5

3. Poor definition cannot be rectified by excellent execution 6

4. Do you know how the contingency was priced and how it is being used? 8

5. False security of the black box 10

6. Don’t be seduced by ambition 11

7. The false success of soft budgets and loose schedules 12

8. Pay attention to key relationships 13

9. Where is the opportunity register? 14

10. Schedule drives cost is only part of the story; procurement and contracting also have a part to play in ensuring best value 15

WHY DO SO MANY COMPLEX PROJECTS FAIL TO DELIVER?

As commercial contract specialists and advisors, we at RSM are critically aware of the challenges that complex programmes can present to organisations. Large projects of all types – in IT, construction, transport or in the mining industry – can test an organisation’s contract and project management capabilities to their fullest.

Delivering these projects on time, within budget and to specification has always been difficult for a myriad of reasons. Not least because they are:

• commercially complex high-risk and high-cost endeavours (for both client and supplier organisations) and often demand sophisticated contractual relationships with a number of key suppliers and their sub-contractors;

• always top of mind for CEOs, boards, shareholders and stakeholders alike, and are generally in the public domain – resulting in pressure and a spotlight on delivery teams; and

• made up of multi-faceted and multi-layered programmes of work that are inherently difficult to co-ordinate and manage; often demanding a unique combination of leadership, creativity, teamwork and technical delivery skills across diverse sets of specialist teams and organisations.

Although there have been significant improvements in project governance in recent years, many high profile projects still fail to be seen as successful. Our view is that whilst there is no definitive silver bullet solution for success, there are invaluable lessons to be learned by avoiding the common pitfalls.

This paper seeks to share lessons and highlights what can be done to improve the likelihood of project success. We have drawn from our experience and used real examples of complex programme challenges, deliberately chosen to provoke thought and generate debate. We hope you find them both valuable and interesting.

Walter AkersPartner

3

1 GET THE COMMERCIAL GOVERNANCE AND PLANNING RIGHT FROM THE START

Too many projects are set up to fail from the outset

Getting the commercial planning and governance right at an early stage is important to achieving eventual project success. The ability to influence the project outcome diminishes as the project progresses. At the same time, the cost of change and rectification dramatically increases with time (as shown below). Therefore the quality of decision making at the outset is crucial to the eventual outcome and success of the project.

It is important that, at an early stage, all key stakeholders are involved and commercial / procurement professionals are on board. A stage or gate approach to project evaluation and decision making is helpful, with clear accountability assigned for all aspects of the project including the commercial and cost outcomes.

We failed to get on top of the planning and our governance only really started after work on the ground commenced. That was a big mistake, thereafter we were always playing catch-up and no amount of effort later on could compensate for this failing.

Client project manager Office renovation programme

Cost of change and rectification

Ability to influence the final outcome and direct success

High

LowTime

Cost of rectification

4

2 HAVE YOU GIVEN RISK TO THE RIGHT PERSON?

Risk should be placed with the party best able to manage that risk. However, very often, risk within the supply chain is placed with the party who is weakest in the commercial negotiations.

Perversely this often means that the challenge of managing these complex risks is left to those least equipped to do so, as organisations that are at a disadvantage in the commercial negotiations are also often those that lack the necessary scale, capacity and resources. Typically when things go wrong, these weaker links in the supply chain initially hide the problems until they become critical. Then it falls to the project owner to take charge and mitigate the damage.

The procurement approach employed determines the way in which risk is managed. However, every project has its own particular set of needs and priorities around scope, scale and technical complexity. A well-defined, low risk project will suit traditional tendering and contracting approaches where transferred risk can be readily quantified and competitively priced by the market. At the other end of the spectrum, partnering contracts suit projects of higher risk and complexity that require collaboration under risk reward sharing arrangements.

We knew they were desperate for the work and they needed to win the contract so we were able to negotiate hard. We forced them down on a low fixed price and also got them on the hook for delivering against a tight schedule. If something went wrong they had to fix it at their cost. The problem was that as things inevitably did go wrong they could not respond and finally when they ran out of cash we had to step in and appoint another contractor to take over.

Project manager Transport infrastructure project

5

3 POOR DEFINITION CANNOT BE RECTIFIED BY EXCELLENT EXECUTION

We knew the specification was not quite right, but we were under pressure and pushed on regardless. In the end the inconsistencies in the specification led to extensive rework – we paid a heavy price for not tying down the specification from the outset.

Programme manager Automotive tooling programme

For most projects, success or failure is determined during the initial stages of the programme.

Without proper attention and investment in the initial “identify, select and define” stages, there is little chance of projects meeting their overall objectives. In many cases failure to meet objectives has been blamed on poor execution, but when this is analysed properly often the problems in the execution phase have arisen because of poor preparation at the start of the project. It is important that sufficient time and competent people are involved to assess the opportunity properly, identify its value drivers, risks and uncertainties, align objectives with stakeholders and achieve high quality definition of scope, schedule and commercial contracts.

As is demonstrated by the graph below, experience has shown that good up front preparation and definition delivers a better outcome even if execution is poor.

Identify Select Define Execute Operate

Good definition and execution

Good definition and poor execution

Poor definition and good execution

Poor definition and poor execution

Val

ue c

aptu

re

The impact of front loading on project outcome

6

7

4

Accurate estimation and reliable budgets are needed to successfully price and deliver any complex project.

An important aspect of this is to determine an appropriate amount of contingency. Contingency is the amount added to the base estimate for incomplete project definition and specific project risks. Each organisation needs to consider its own desired estimate accuracy, but a good starting point is the P50 budget amount, where there is an equal chance of costs exceeding or being lower than the estimate. (This is illustrated in the figure below: Project estimation accuracy graph). On very large projects a probabilistic cost risk analysis should be performed and a cost risk distribution produced taking into account risk correlation and other sensitivities. This is illustrated by the normal distribution curve below.

Understanding the contingency and how it has been determined is important in negotiating contracts and pricing work. It is in every contractors’ own interest to over price the contingency and project owners should scrutinise and challenge this area.

Tracking the contingency throughout the project is important in controlling costs and managing overruns. It is not uncommon for the contingency to be used up before a project is completed and for this only to come to light when the prime contractor starts putting in cost claims in the latter half of a project.

DO YOU KNOW HOW THE CONTINGENCY WAS PRICED AND HOW IT IS BEING USED?

We knew that our main supplier’s estimates for contingency were too generous. However, our team could not really provide the board with enough evidence to challenge the estimates. It was not until we brought in a specialist at the tail end of the project that we discovered that we could have saved money by apportioning contingency in a different way.

Project director University capital build

Under expenditure

Pro

babi

lity

of e

sitm

ate

over

run

10%

50%

90%

Over expenditure Accuracy / cost

Project estimation accuracy graph

Most likely P50 cost

8

9

5

If it matters to the project outcome, don’t treat it as a “black box”. Don’t blindly trust others to deliver the final outcome. Actively monitor all significant aspects of the project from start to finish.

Problems on projects are often initially hidden from view or are buried deep in the supply chain. They usually only come to light in the latter stages of execution. It is not uncommon for a project to report “green” against all KPI’s initially, only for cost claims and variation charges to surface later-on.

The key to keeping on top of this is to use the project governance processes to work for you. Good governance requires far more than checking compliance against the original plan – it requires a challenging independent mindset, rigorous enquiry and attention to detail with a practical understanding of the pressures of project delivery.

FALSE SECURITY OF THE BLACK BOX

Next time we will do things differently. We thought that the prime contractor would manage these risks. That is what we paid them to do, but they did not ultimately solve our problems. We let them get on with it and our mistake was that we did not monitor progress or verify what they told us. The problems only came to light during the latter stages of the build. Solving them so late in the schedule was expensive and delayed completion considerably.

Programme director Leisure complex building project

10

6DON’T BE SEDUCED BY AMBITION

It is all too easy to get excited about new technology and cutting edge design. Being at the forefront of new thinking can be the right answer in some situations however it is important not to lose sight of your real needs.

Be aware of highly customised specifications that result from personal preference in the design by architects, civil engineers, IT developers and others that over specify the requirements instead of meeting the organisations core needs. This creative customisation increases total costs through product/feature proliferation, over specification and an inability to leverage spend and reduced competition from artificially limiting the number of suppliers that can meet the demand.

To gain efficiencies across the project, design activities and specifications need to be standardised and focused on your real needs. By employing techniques such as Value-Engineering (VE), an organisation can influence specification design and drive standardisation. VE is a systematic method used in the assessment of a product or service to improve the value by reviewing function and associated cost. Adopting this methodology ensures the technical specifications are closely aligned to an organisation’s or project’s core needs and provides a fair balance between meeting the technical and commercial requirements

We were seduced by the ambition of the solution. It was innovative, leading edge and exciting. But we lost sight of our original goals and our real needs. In the end we spent way too much on a system, most of which we did not need.

Senior business stakeholder IT case management system development

11

7THE FALSE SUCCESS OF SOFT BUDGETS AND LOOSE SCHEDULES

Project overruns and missed deadlines are normally cause for concern.

However we should be just as concerned with the converse: a project that is always reported as within budget and delivering milestones on time is often an indicator of wasteful over estimating for costs and time. A good timetable and resource budget should create a healthy tension on the project and create a sense of urgency and attention to resource allocation.

It is important that there is a clear understanding between the base budget and any contingency for risk and uncertainty.

We realised that the contractor had built lots of extra time and resources into the schedule. It was easy for them to deliver ahead of the milestones. At first everyone was happy that the project was reporting ahead of schedule and within budget but ultimately we paid more than we should have and the project took longer than necessary.

Construction programme director City regeneration programme

12

8PAY ATTENTION TO KEY RELATIONSHIPS

Aligning project goals and incentives across both internal teams and throughout the supply chain is key if you are going to get everyone working together. If it is important to the project you want it to be important to them.

Of equal importance is nurturing a healthy and mature relationship with contractors and suppliers. In some organisations there is a culture of having a transactional “cost down” or even adversarial relationships with third party suppliers and a reluctance to form partnerships. This is a missed opportunity. Positioning the organisation as a supplier friendly customer – one that is easy to work with and willing to develop win-win partnerships – will make an organisation more attractive in the market and secure preferential treatment from suppliers. This is crucial to effectively deliver complex projects where risk needs to be shared across multiple parties.

Our IT implementation failed because we could not get everyone to work together. The teams sat in different silos and spent all their energy infighting and blaming suppliers when things went wrong.

Project manager ERP solution implementation programme

13

9

Uncertainty, within projects, can be both good and bad.

On most projects there is a huge focus on managing risk. Projects include detailed risk logs and set out mitigating action plans. These logs are regularly updated and monitored. Rarely do projects have an opportunity log of what could turn out better than planned or where uncertainty should be managed for advantage. As a result, the full value of the project may not be achieved.

WHERE IS THE OPPORTUNITY REGISTER?

We focused so much attention on managing all the things that could go wrong we failed to take full advantage of an unexpected opportunity. The market price of raw material commodities fell sharply during the course of the build, but we were slow to change our procurement strategy and missed an opportunity to save a huge amount of cost.

Head of housing improvement Inner city council

14

10 SCHEDULE DRIVES COST IS ONLY PART OF THE STORY; PROCUREMENT AND CONTRACTING ALSO HAVE A PART TO PLAY IN ENSURING BEST VALUE

As most projects are highly bespoke and are not often repeated by an organisation, it can be challenging to achieve the best procurement and contracting outcomes.

Also, as they fall outside of the organisation’s day to day operations, normal business processes are sometimes circumvented. For example aggregation of total project demand, buying standardisation and forecasting are difficult and often overlooked but necessary to secure value for money.

Key to success here is to plan early and to implement a procurement and contracting strategy. Ensure that you actively coordinate procurement through the supply chain and look for opportunities to leverage the projects total buying power to reduce costs. Manage spend on a consolidated category basis and not simply by contractor. Use up to date market intelligence throughout the project to flex the strategy and make better real time decisions.

Initially each contractor was responsible for buying their own raw materials even though any price increases or savings would be passed through to us as the project owners. Once we consolidated all this procurement across the whole project we achieved significant buying power and savings that would not have been possible otherwise.

Purchasing lead Rail refurbishment and upgrade project

15

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For more information speak to your local RSM contact or get in touch with a member of the team:

Walter Akers Partner

M +44 (0)7561 327662 [email protected]

Andy Murray Partner

M +44 (0)7776 [email protected]

Chris Knowles Partner

M +44 (0)7808 161351 [email protected]

Phil Stanton PartnerM +44 (0)7914 137444 [email protected]

Sola Fadojutimi Director

M +44 (0)7538 180470 [email protected]

Manpreet Mahal Associate Director M +44 (0)7436 [email protected]