Correcting the course of capital projects

Any company that has ever undertaken major capital building projects knows they almost always take longer and cost more than expected. Unless strong project controls are in place, project owners often don’t realize the severity of delays and cost overruns until well after a project has foundered. Proper governance and control processes are essential for spotting problems early and getting projects back on track quickly. The more time and effort companies put in at the outset, the greater the chance they will keep projects in check throughout the construction cycle.

What causes cost overruns?

Factors contributing to poor project performance

Why projects veer off track

“A capital project is rarely derailed by a single problem; it usually takes a series of failed steps along the way to put a project in jeopardy,” Daryl Walcroft, Walcroft, PwC US Capital Projects & Infrastructure partner.

While all projects are susceptible to going off track, some are more vulnerable, such as those involving new technologies, those dependent on regulatory decisions, and those in politically unstable regions. Also, large projects are inherently risky, with some exceeding $1 billion over many years and encompassing many moving parts, resources, and contractors. And in new markets, project developers face special problems, including language barriers in contract negotiations, different legal standards, a greater likelihood of political interference, and the need to import skilled labor, equipment, and materials.

Factors contributing to poor project performance

What causes cost overruns?

Getting off on the wrong foot
Many projects experience problems along the way because they didn’t get off to a good start. There could be ill-defined cost and schedule estimates, as well as a failure to define the scope clearly and set reasonable expectations. Poor estimates during project planning and missed deadlines are the largest contributors to project failure, according to Insights and Trends, PwC’s 2012 global survey of project management leaders. Furthermore, fewer than half of survey respondents say that an effective, formal process is in place to manage changes to baseline plans.

Projects can be saved
But even projects that veer far off track can be corrected if both the owners and contractors are amenable to working together to resolve the immediate problems and establish a more effective plan for managing and monitoring the project going forward.
The three key elements of the control environment are proper transparency of controls, clear accountability of responsibilities, and a meaningful audit trail of information to make sure people are performing their required roles effectively. An effective risk management process is also critical. It enables project managers to monitor risks and identify when they need to put a mitigation plan in place to actively manage them.

Early warning signs to watch for

The best way to get back on track fast is to be alert to red flags. Such signals mean it’s time to investigate to determine whether the project is truly in trouble and if so, how to fix the problems. Two obvious signs of project trouble are requests to expand the budget and stretch the schedule. Other indicators that a project is in peril include changing project scope, materials delays, suspicion of fraud, or quality and safety concerns. One serious injury or a string of minor injuries can indicate a need to halt the project, investigate causes, and perhaps revise risk management plans.

Numerous revisions to architectural drawings and a flurry of requests for information are among the most telling red fl ags. RFIs often indicate that design documents were not complete enough for contractors to understand. Another sign of trouble is a host of change orders from the owner, which can significantly affect cost and schedule.

How to get projects back on course

  1. Take a time-out to regroup − Get all the key people together to discuss their status, the issues, and the potential solutions.
  2. Seek outside help − A willingness to work with a third party consultant or mediator is often key to getting projects back on track.
  3. Balance cost, quality, and time − The knee-jerk response to a troubled project might be a push to cut costs or to rush to get back on schedule. But in trying to cut costs that are out of control or speed up a project that has fallen behind, quality may suffer.
  4. Layer in transparency and accountability − Some projects need multiple solutions to recover from delays and cost overruns.
  5. Build penalties into the process − Owners of troubled projects should consider not only incentives for contractors, but also penalties.
  6. Seek experienced project managers -- To help fix troubled projects, owners may need to strengthen their project management team by filling in gaps or bringing in different people with greater experience.
  7. Maintain a comprehensive audit trail − Litigation is always a possibility, so all parties should thoroughly document project decisions and developments.