Managing Project Costs and Risks




This morning Business Day had a headline reading, “Cost estimate ‘optimistic’, says Transnet”. This follows yesterday’s announcement by the company that the cost of its multiproduct pipeline from Durban to Gauteng had more than doubled, from the initial R11,1bn to R23,4bn. Not only is the project suffering from cost overruns, the project was expected to be completed by the third quarter of this year. After reading the full cover story, it made me ask the same question that continues to be asked over and over again: How many projects have bust their budgets and how many are still yet to do the same thing?

Governments and world’s biggest companies continue to invest heavily in infrastructural development projects to sustain a growing economy and population. Here in South Africa, according to the Minister of Economic Development, Ebrahim Patel, the government plans to spend R800 billion on energy and transport infrastructure over the next 3 years. This figure is expected to rise to trillions of rands over the next 10 to 20 years with a huge chunk of this spending going towards energy infrastructure. In 3 years time, will the government have met its R800 billion budget or we will be telling a different story?

Project cost overruns are not experienced in Africa alone. Sydney’s iconic opera house, in Australia, retains the world record for the worst overrun. It cost nearly 15 times more than the original estimate and was completed a decade late. The project which begun in 1957 only completed in 1973 on a scaled-down version. The total cost was A$102 million – over budget by A$95 million.

According to the July 2010 publication of the Financial Mail, just before the South Africa 2010 World Cup, in building Greenpoint Stadium, Murray and Roberts, the construction company, had to make up about six months in delays. This was due to the redesigning of the stadium by the City of Cape Town which added an extra R500m to the original bill. Costs soared as the company was forced to source specific materials from overseas for the design changes.

To add more salt to the wound, when M & R signed the contract in February 2007 to deliver the Gautrain project on time, Gauteng government wasn’t able to hand over the land, which meant M & R didn’t have access to the site to do design and geological work. Eventually every piece of land on the 85km stretch was handed over, but 450 days late.

The above cases illustrate the need for excellent project and risk management skills when it comes to project planning and deliverance. Risk is inevitable when it comes to projects of this nature. The first step in preventing cost and time overruns is to acknowledge that they are likely. Some of the reasons projects experience cost and time overruns are as follows:

1. Insufficient skills and resources: A successful project requires a successful project team. There should be diversity in the background of the team members.

2. Poor Planning: Most projects fail because the requirements are poorly defined and there is no agreement or prioritisation of tasks to be completed.

3. Lack of understanding about cost drivers: There is need to identify those activities that are more likely to reduce the project’s duration and cost and then establish a contingency plan.

4. Inadequate Information: Past performance alone is not a good predictor of future performance. Data on which some projects are based is just plain wrong and obsolete.

5. Unforeseen problems: Sometimes people are overconfident about what can be achieved with the resources available and fail to plan for the worst case scenario.

6. Inadequate checks on estimates and work: Many people make the mistake of using a fixed budget from the initial planning phase and when macroeconomic conditions change, they fail to take this into consideration.

7. Poor Project Leadership: This will always lead to poor project direction and management.

8. Political Pressure: the existence of political pressure, vested interests or fear of a lack of approval also result in cost overruns.

So what should project leaders do to control the costs of a project and avoid overruns?

1. Have a business case: This drives the project and details the costs and benefits to be accrued. In other words, the business case clearly defines and prioritises the project’s requirements.

2. Identify the direct costs and indirect costs: Distinguishing between direct costs and indirect costs helps identify those costs that are assignable to specific package of activity and those that are not. It also makes it easier to identify cost drivers.

3. Validate forecasts and estimates: These should be based on adequate information and not biased. In order to make realistic estimates, it’s important that you use a range of information sources. Using reference – class forecasting (RCF) helps make comparisons between the project in question and those of a similar type.

4. Management should be involved: Senior managers should sponsor the project throughout its lifetime and not only at the start.

5. Be proactive: This involves continually seeking alternative ways to meet deadlines.

6. Consider lower-cost alternatives: This involves sourcing out quality materials from various suppliers at a lower price. However, avoid poor quality materials just because they are the cheapest on the market.

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