Late Changes Impact Total Project Cost, IPA Says
Parties involved in capital projects need to pay more attention to the carpentry adage “measure twice and cut once,” according to capital projects advisory firm Independent Project Analysis.
Research from the consultancy has revealed that major late changes add on average 12 percent to the total project cost. The knock-on effect of this is the need for supplemental funding – and ultimately a threat to achieving the planned return on capital.
“Business executives are caught off guard and none too pleased when project teams come back for supplemental funding. But very often extra funds are needed because the level of project definition—and therefore the quality of the cost estimate—was not well understood when the project was authorized,” said Ronell Auld, associate project analyst at IPA.
While project teams are responsible for planning and executing the engineering, procurement and construction of projects, business executives still hold the project risk and need to understand the quality of the estimates presented for sanction.
The level of definition, or front-end loading, drives the quality of the estimate and gives the project sponsor a sense of how accurate the project estimate is likely to be. “Projects that are not well defined have more unknowns, and the more unknowns, the less accurate the estimate. However, business discipline that links the level of definition to the quality of the estimate is often missing at the start of project investments,” Auld said. “Too often, we have seen business sponsors, eager to see the project field work commence, proceed to full funds authorization with limited definition and too much confidence in the estimate. Business sponsors then become very frustrated with projects for overrunning their budgets.”
The problem, he added, is not with the estimates, it is with the lack of understanding of the basis of the estimates.
IPA was recently brought in to help a transportation company improve gatekeeping governance for authorization of capital projects. The company was facing several problems, including large overruns on recent projects. IPA evaluated the company’s capital delivery process and interviewed key stakeholders to uncover the root causes of late changes.
“Based on our findings, the company has updated its work process to provide early funding and associated resources to complete basic design. This change gives project teams the bandwidth to further define the project and improve the accuracy of the estimates presented for full funds authorization,” Auld said.
IPA described the “measure twice and cut once” approach as optimal to reducing the risk of project cost overruns.
