Fighting against optimism

What are the challenges and risks that differentiate mega-projects?

CD: Mega-projects – which we usually define as projects exceeding $1 billion in cost – bring unique challenges. The risks in these projects are not merely scaled up in a linear way from the cost and schedule overruns that often plague smaller capital projects, but increase exponentially for a range of reasons.

The first reason is complexity. Very large capital projects are often executed in difficult geographic locations such as an airport in a congested urban area or an oil and gas development in the Arctic. Such projects often also feature first-of-a-kind (FOAK) technologies such as new nuclear reactor designs. Because of their scale and risk, mega-projects are often pursued as joint ventures to spread the risk and often have multiple stakeholders. This adds considerable complexity in decision making and governance on the projects.

The second reason is that the scale of a mega-project creates a multiplying effect with respect to systemic risks and project inter-dependencies. For example, a schedule delay caused by the lack of a critical piece of equipment is often driven by a root cause such as competition with other large capital projects for the same equipment. This becomes a systemic risk, increasing costs and delaying the schedule throughout the project.

The third reason is excessive optimism on the part of those undertaking the project. These are often people who have executed many smaller capital projects, often with a good success rate, who view a mega-project as merely a scaled-up version of something they have encountered before. This leads to insufficient advance planning and analysis.

For example, far too often the technical complexity and schedule pressures combine to lead projects to start construction without detailed engineering having been completed. Moreover, an insufficiently robust risk management programme inhibits management from anticipating challenges, redeploying resources to mitigate potential occurrence, and developing common sense back-up plans for certain risk exposures.

What are the factors and capabilities critical to successfully delivering mega-projects on time and on budget?

CD: There are four critical elements to successfully delivering mega-projects. First, undertaking sufficient advance planning and analysis is critical to understanding where risks to cost and schedule lie. Successfully executed mega-projects feature not only robust schedule and budget development but also the use of simulation techniques such as 4D or 5D modeling and probabilistic analysis of cost and schedule. These projects often also employ physical simulations such as the use of dry-runs and mock-ups for critical stages of construction.

Second, successfully executed mega-projects create a unified consortium of owners and constructors with the right incentives and alignment around shared goals. No contract – no matter how complex – will be able to anticipate the changes and challenges that will occur over the life of a mega-project so the working relationship matters more than the contractual protections that are envisioned.

Third, effective governance and decision making are essential in these large multi-year endeavours in which many unanticipated changes and challenges will occur. This is especially true in light of the organisational complexity that is often the case with mega-projects that have multiple owners, constructors and stakeholders.

Fourth, a robust risk management programme instituted at early stages of the project and continually revised and refined throughout the life of the project, should be the primary means for understanding major drivers of cost and schedule uncertainty and for developing and executing mitigation strategies.

How can risk management on mega-projects be improved?

CD: There are a number of ways that risk management on megaprojects can be improved from typical practices. The first and most important is ensuring that risk management is not simply a compliance or “box-checking” exercise but builds a direct line of sight to the value of the project and has a seat at the table with critical decision makers.

The second is ensuring that discipline is instituted and maintained in keeping the risk management programme continually revised and refined as the project progresses.

Thirdly, many risk management programmes suffer from an overly narrow view of risk and uncertainty. It is human nature to discount uncertainty in the future. The world is a much more uncertain place than we tend to believe – social scientists have found hundreds of biases that lead us to this overly narrow view of the world. A robust risk management programme must challenge these biases and encourage a broad view of risks. This broader view of risk includes incorporating “unknown unknown” or “black swan” risks into the analysis. These are high-consequence, low-probability risks that are endemic to mega-projects.

Finally, it is critical for a risk management programme to ensure broad awareness across the project and stakeholders and to build alignment around the risk mitigation strategy.

Are there examples of mega-projects that have been successfully executed? What differentiated them?

CD: There are a number of examples of successfully executed mega-projects. The construction of Heathrow Terminal 5 in a dense, heavily congested urban area, and with the operating constraints of one of the largest airports in the world, would have been expected to encounter numerous challenges. While the baggage handling system had a number of problems when the terminal opened, as a construction project the $6 billion terminal was very successfully executed. This success was due to the investment of the owners and constructors in a substantial amount of advance planning and analysis (including the use of numerous dry-runs and mock-ups) as well as an innovative approach to both risk and consortium management that the owner adopted.

This innovative approach to risk, in which the owner essentially assumed all of the risk on the project, not only allowed the construction consortium to be aligned around a single goal, it also saved considerable schedule and budget and ultimately, proved its benefit with the successful execution of the project.

More broadly, there are numerous technologies in the “nth-of-a-kind” (NOAK) stage of maturity whereby there have been enough repeated projects that design is complete and upfront planning and execution more standardised. Project costs and schedule outcomes are more predictable. The challenge for many such project types, however, is completing the initial (FOAK) projects successfully enough to prove viability to prospective owners and investors, progress down the cost learning curve rapidly, and provide opportunities to build NOAK projects.

What role does Strategy& (formerly Booz & Company) typically play in mega-project planning and execution?

CD: Strategy& supports engineering, procurement, and construction (EPC) firms, project owners, suppliers, and investors throughout the life-cycle of a mega-project with an array of management-level advisory services. Specifically we support initial investment evaluation, decision analysis, and advance planning through to programme management, risk management, the institution of governance and project controls, and including start-up and de-commissioning.

We have supported hundreds of large capital programmes from the $90 billion US Navy nuclear submarine programme to transportation, energy and infrastructure projects in every region of the world. We have gathered lessons learned from those projects into tools such as a global delivery framework and capabilities assessment tool that allows us to measure our client’s capabilities in 30 critical areas against best practices.

We have been able to deliver real value to our clients in areas such as cost and schedule improvement and risk mitigation as well as finding real savings in areas such as procurement. The combination of Strategy& and PwC enables us to support clients with not only finding opportunities for performance improvement but also working side by side in implementing the improvements and achieving the promised results.

Christopher Dann is vice president at Strategy& (formerly Booz & Company), a member of the PwC network focused on assurance, tax and advisory services