Megaprojects: The Good, the Bad, and the Better
Our experience indicates that if project developers or project sponsors spend three to five percent of the capital cost of the project on early-stage planning and scheduling, it tends to produce far better results in on-time and on-budget delivery.
October 2014 | by Jack Kuhlman
Infrastructure megaprojects are crucial to the future of cities, states, and individual livelihoods. The problem is that these projects often go off the rails, either with regard to budget or time—or both. However, it’s important to remember that building and maintaining infrastructure is a critical and sometimes even lifesaving undertaking. Sewage and water-supply systems, for example, keep diseases such as cholera at bay. Much of the Netherlands would be under water without the North Sea Protection Works, which guards that low-lying country’s landscape
Big infrastructure projects can also be economically transformative. Consider the Panama Canal. It accounts for a significant share of the country’s GDP. Dubai’s international airport is the world’s busiest, accounting for twenty percent of Dubai’s employment and thirty percent of its GDP. And Hong Kong would surely grind to a halt without its clean and speedy subway system, the MTR, which has enabled the densely packed city to build beyond the downtown districts.
How to Deliver on the Promise of Megaprojects
Any big project carries a big opportunity for failure, but regularly going over time and over budget implies that there are systematic errors at work. And that means these problems can be identified and addressed.
Typically, when projects go wrong, hindsight shows that the problems began at the outset, due to poor justification and need for the project, misalignment among stakeholders, insufficient planning, and inability to find or use the appropriate capabilities. Costs are commonly underestimated and benefits overestimated. As a result, the baseline for assessing overall project performance is wrong. The key is to first establish social and economic priorities and only then to consider what projects are best suited to deliver them. That requires developing independent and robust analyses on the true cost and benefits. Some countries are closer to achieving this ideal than others. Singapore, for instance, has a national goal for dense urban living, with public transit accounting for seventy percent of journeys. This aspiration guides how the Land Transport Authority selects transport projects. Without such rigor and oversight, you can imagine bridges to nowhere, excess power supplies, and empty roads.
Distressed projects have another thing in common: they lack adequate controls. Specifically, they do not have robust risk-analysis or risk-management protocols and do not provide timely reporting on progress relative to budgets and timelines. The data used to report on project progress are typically outdated (as they generally rely on payments to contractors rather than on actual work performed) and not aligned with the true progress of the project. In addition, baselines get adjusted time and again, and contractors and owners use different metrics to measure progress. It is problematic when there are multiple estimates of the cost and time performance of the project relative to the baseline, which means there is no common understanding of performance. This limits the partners’ ability to figure out how to accelerate project delivery and control cost overruns.
A more sophisticated approach is to use real-time data that measures activity in the field, such as cubic meters of concrete poured or earth moved, relative to work plans and budgets. This differs from the usual approach, which is to track progress by measuring funds paid to contractors relative to budget.
Measuring progress on the basis of cash flow, however, is less than ideal, because usually it takes more than thirty days to pay. That means the related data are out of date; moreover, payments to contractors may not correlate to actual construction progress. Improving project performance requires better planning and preparation.