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Advances in Project Management: Let in the Light on Project Finances

SERIES ARTICLE

By Derek Salkeld 

UK
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We bequeath three things to our descendants: one is genetic material, and the other two, things that are not: our culture and our infrastructure.  Of these two, it is infrastructure that contributes most to the quality of the lives we lead because it provides the greatest good for the greatest number.  However the genesis and development of infrastructure is not common knowledge in the way that, say, those of film or music are but even so there are two things everyone knows about infrastructure projects.  I was asked to give a lecture to an audience of academics a few years ago.  I introduced myself and then wrote up the names of half a dozen fictional projects on the board: the Buenos Aires Tram, the Russo-Canadian Air Traffic Control system, the Australian Federated Health Care Record System, and so on.  I made them up as I wrote but I did not reveal this to the audience.

I then asked the audience why these infrastructure projects had suddenly become newsworthy in their own countries.   After five minutes, we had a broad agreement that it must be because these projects were late and over budget. Late and over budget: this is what people who know little about infrastructure projects do know about infrastructure projects.  But is it true?  Do projects overspend and overrun?  Or is it an urban myth?

Research into this is clear: yes they do.  The research is not extensive, which is surprising in itself because the business of delivering infrastructure has to be large simply because there is so much of it out there, and what is more, it has been underway for centuries. The academic analysis is summarised in two excellent books.  In The Management of Projects (ISBN 0 7277 1693), Peter Morris describes how he set out to check the truth behind the oft-heard objective of the project management profession that it aims to deliver on time and on budget.  He found published accounts for 1449 projects, of which only twelve had.  He wrote that he later repeated the analysis with 3000 projects and found a similar result. In The Anatomy of Major Projects, Bent Flyvbjerg, Bjorn Azelius, and Werner Rothengatter.  (ISBN 0 521 00946 4)  assessed 260 projects and concluded that to be 90% confident of delivery within budget it would be necessary to add mark-ups of the order of 60% to their estimates, depending on the type of infrastructure: rail or roads and so forth.

Such is the concern among the funders of infrastructure projects that there have been some analysis-based initiatives that seek to compensate in advance of committing to a project for its anticipated overspend.   Like in Professor Flybjerg’s book, these seek to identify a percentage uplift that should be applied to a project estimate to give a desired level of confidence that its final cost will not exceed a target value.  Generically, they are known as reference case forecasts.  I think the approach may not be useful in practice because, first, no two projects are ever quite the same.  Even if the next string of pylons or the next viaduct is the same as the previous one, the project context: geomorphological, geological, environmental, public reception…and so on will be different and these influences can easily cause changes to an otherwise standard project that will alter its costs and timescales.

Second, reference case forecasting seems to me a self-fulfilling prophecy, a perfect feed-forward loop.  Say a mark-up of 60% is added to the estimate at the time of project approval to cover potential overspend, then I cannot imagine normal marketplace behaviour ever resulting in the final costs being appreciably less than 60% more than the estimate. The funding is there so suppliers will try to get it.

I would therefore like to propose something different, something that avoids the pitfalls of reference case forecasting.  I think we should try to calculate the extent to which a project may overspend (or overrun) before it is sanctioned.  I think this will have two major benefits.

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About the Author 

flag-ukpmwj17-dec2013-salkeld-AUTHOR IMAGEDerek Salkeld

Southwest England, UK

Derek Salkeld has been a risk analyst and risk manager for 20 years. He trained as a geophysicist and led a signal processing systems design team for a UK military systems manufacturer. He has extensive experience of multi-disciplinary engineering projects covering a wide range of assets including: the assessment of Network Rail’s IT investment programme; the development of an asset investment model of waste water treatment systems owned by the Water Service of Northern Ireland and the business case for the London Cross Rail system. He was risk manager on both the recently opened London cable car and the East London Line projects. He is currently advisor to London Underground Limited on its stations capital works programme and to Genesis Power on its Tekapo hydro-electric projects in New Zealand. He is a doctoral research student at the University of Exeter researching risk management methods.

Editor’s note: The Advances in Project Management series includes articles by authors of program and project management books published by Gower in the UK.  The articles are coordinated by series editor Prof Darren Dalcher, who is also the editor of the Gower Advances in Project Management series of books on new and emerging concepts in PM.  Prof Dalcher also provides an introduction to the current month’s article, which you can see elsewhere in this month’s edition.”  Information about the Gower series can be found at http://www.gowerpublishing.com/advancesinprojectmanagement.