In this two-part series, Brandon Davis offers five rules for capital project success. Part 1 below includes the first three rules. Watch for the remaining two rules in Part 2, which will be published next week.
This article’s subtitle might seem a little extreme, but the truth is that—from a board of directors or shareholder perspective—most major projects executed in North America these days are a disaster regarding meeting project goals and expectations. Recent detailed academic studies reveal that only five percent of major projects perform within +/- 5% of their original authorized budgets and schedules. Seventy percent deviated more than ten percent from the original capital project authorization. Worse, nearly eighty percent of major industrial projects did not meet ROI calculations projected during the original capital project authorization.
Like many of my teammates at The Austin Company, I’ve had the benefit of serving in owner-side and contractor-side project roles during my career. By leveraging the lessons learned and insights gained from this mixed range of experience, we have maintained and enhanced Austin’s long track record of consistent, predictable results. Through all these efforts, we have developed lessons learned and rules to help ensure projects are successful. Here are five that help position a project for success
- Be Mindful of Early Budgets/Estimates
One of the best capital project leaders I ever knew regularly said, “The only thing I know for certain about the early estimates our team presents to me is that they are wrong. They are too high, too low, or something will come up we have not thought of.”
Statistics prove this statement is true. The Construction Industry Institute (CII) reported recently that over eighty-five percent of major projects miss their early board-approved estimates. So, be careful of early estimates. Even when pricing is based on input from trusted “contractor buddies” who preach on general costs, it is critical to ask questions on the source basis and reliability of the numbers provided. A short set of such questions reveals how easy it is to start digging into (or overlooking) the accuracy of incoming information:
- Do we know the scope? Have we fully defined the scope yet?
- What is the source of the pricing information offered?
- Does the “contractor buddy” do this type of project? What’s their expertise?
- What scope or type of facility did the “contractor buddy” give you pricing for?
- Does he have a full fit-out of the proposed facility?
- Do his numbers include site work?
- What about that rail line extension (or other significant but easily overlooked project element)?
- Does he address new utility services that may be needed?
- Did he include engineering costs?
- What about permitting?
- Did he include equipment? What equipment?
- Did he put some level of contingency on the number?
These questions could go on and on, but they illustrate the point: the critical activity is to ask the questions before assuming estimate-or-budget-related information is accurate or reliable, even if it comes from “the marketplace.” It’s too easy for sincere and experienced (or opportunistic) contractors to offer seemingly reliable pricing or budget information without being adequately versed on project details.
Many project owners are burned by early budgets that are based off a previous project, or are budgeted by a contractor who received a phone call or an email. Contractors are known to respond with general estimates that aren’t based on any details of the scope needed (i.e., “You need help budgeting a facility? Sure, I can help, buddy. An industrial building? Oh, probably about $X per sq. ft.”).
2. Guard Against Overzealous Leadership or Board Presentation
As a project develops, it’s natural for the project’s champion to be overzealous or overly positive about its prospects, features and attributes. These individuals assume the role of advocate and often have a personal stake in outcomes. With zeal and enthusiasm, they’re also known to minimize, ignore or dismiss project risks or trouble spots (even though in most cases this isn’t done intentionally or deceitfully). As the project champion, they want to see the project approved and have an incentive to move quickly toward securing project approval. They want to deliver the project for that internal user. They want another “win.” Winning can be infectious.
Such project advocacy or excitement can cause the champion—and sometimes the whole team—to view project issues, opportunities, risks and problems through optimistic rose-colored glasses. For example, when a range of pricing is offered, project advocates perceive—and swing toward—the bottom of the range. When they see risks, they optimistically conclude “no problem, we’ll manage around those.” The rose in their glasses may prevent them from seeing risks or scope-gap issues. The list goes on.
Excited and passionate project champions are a good—if not essential—part of the process. Every project needs a champion and a solid advocate, no question. After all, it’s hard to get a project off the ground without a great amount of energy, organization and team leadership. But, the advocacy and excitement must be tempered with reality. The champion’s team and the executive leadership team approving the project, are thus responsible for ensuring project praises and prospects are brought gently and appropriately back to Earth, and that all risks have been discussed and, if possible, mitigated.
The team must ask questions, poke, prod, and seek gaps and problems—earnestly and forthrightly. Some team members may have to overcome their fear of offending the project champion or diminishing his/her energy or passion (they fear being perceived as attack dogs, purveyors of bad news, or non-team players.). The truth is, by respectfully challenging the advocate as early as possible, team members help set the advocate, the entire team, and the project up for success—and by sheepishly avoiding raising their voices, the team potentially sets the stage for failure.
3. Define the Scope Clearly
At Austin, we deliver the physical environments that allow the world to function (i.e., buildings, facilities, process design, production equipment, infrastructure, etc.), yet most of what we do is not that complex. Generally, our projects succeed by following established protocols, formulas or “recipes.” I’ve personally been involved in at least half a dozen projects experiencing a significant performance problem in the past and 95 percent of these problems are rooted in failure to adhere to the success formula—the basic blocking and tackling of project delivery.
A very common issue is a lack of project definition upon project initiation. While many circumstances can drive this, the absence of a well-defined project “scope” almost guarantees costly or time-consuming issues during project execution. Upfront clarity and correctness requires some early investment, but is well worth it. Spending the pennies at the outset on scoping and design will save significant dollars, and maybe careers, during project/construction execution.
At Austin, we have a process called “Step One,” which helps define a project’s critical scope elements (all of them) that can significantly impact cost and schedule. This process is sometimes called preliminary design, schematic design, FEL, FEED, or other names, but it’s all essentially the same: a critical front-end design and scoping effort that identifies and details all critical project elements. I suggest engaging a design-build or EPC company to conduct this work—most of them offer some version of this front-end work as a service. This is advisable because, in my experience, engineering/AE-only firms simply don’t have sufficient exposure to, or understanding of, the critical elements (and which ones must be strongly defined) from a construction execution, cost, schedule and risk standpoint.
Watch next week for Part 2 and the remaining two rules!