Four moves to improve big-project cost forecasting

Somewhere, right now, a large engineering and construction (E&C) project is going off the rails in terms of costs. So common is this occurrence that in PwC’s 26th Annual Global CEO Survey, just 40% of E&C CEOs said that the final outcome of projects often or usually meets or exceeds targets for financial performance—the lowest of any of the 23 sectors the survey studied.

Manufacturing facilities churn out thousands of units a day, with processes that can be refined and optimised in real time or close to it. But E&C projects can span years from initial forecast until final delivery. Moreover, each project is unique. Even when a project involves installing capital equipment with standardised designs, there’s still a host of unique attributes, including government relations, permitting and environmental impact, among other factors. Total unit volume: one. It’s no surprise, then, that forecasting for big E&C projects is tough. Improving those forecasts requires progress on four imperatives:

1. Get better data. Even for bespoke projects, capturing more accurate data about input pricing and how it changes across the development timeline can help firms better understand cost dynamics.
2. Improve digital modelling. More advanced digital modelling for projects costs and timelines—capitalising on the data aggregated in the first imperative—can predict how costs could vary across a range of different scenarios. These tools exist, and they’re getting better all the time.
3. Use inventory management as a hedging mechanism. Weigh the advantages of stockpiling critical or scarce supplies against the additional inventory costs required for storage and security. 
4. Boost organisational capabilities. Building up the organisational capabilities to implement new tools is crucial, and hard. Before covid-19, inflation and the recent supply-chain disruptions, there was less variation in input costs, and E&C organisations arguably didn’t need to be as strong in economic forecasting to get by. Wilder swings in those numbers demand that E&C companies build that strength into their workforce. 

No one can predict the future. But in terms of costs on large projects, E&C firms can use data, digital modelling, inventory management, and human capital to understand the range of possible futures for a given project. Doing so will mean fewer surprises and better financial performance.