Sector - Finance & Legislation

Realising Value from Risk Lessons

The risk of cost overruns can be greatly reduced by applying learnings from past projects – so why isn’t it happening more often? The key could lie in improving our understanding of human nature as well as ensuring there is more accountability.

Serious cost and time overruns on mega projects such as Crossrail have shocked the industry and yet, in many instances, the same mistakes are in danger of being repeated time and again. The latest news on the Crossrail project has revealed that it won’t complete until 2022 and costs are likely to exceed £19bn. For many industry onlookers, these latest setbacks won’t be a surprise however, as late-stage problems of this kind have become commonplace.

One of the reasons that mega projects often overspend is down to human nature; the way our minds work can influence the decisions we make. When carrying out risk assessment workshops, there are often differing opinions about how frequently certain problems arise and the impact they have, due to differences in the way such events  are perceived. There is also a tendency for project managers to be over-optimistic about how projects are performing and the likelihood of reaching the next gateway within the required cost and time parameters. Based on the teachings of Professor Bent Flyvbjerg, an expert in major project management, we know that optimism is part of human nature and, in some instances, it can lead to the wrong behaviours, increasing the likelihood of budget overruns. For example, if costs are increasing on a project, the project manager, along with other decision makers, may be tempted to reduce funds set aside for contingencies, hoping that they will not be needed.

If tackled at an early stage, it is possible to nip a tendency to over-optimism in the bud, but this requires greater risk understanding. For example, using ‘S’ Curves to present budgets and timescales can help to make it clear that the overall cost of a project should be viewed as a ‘range’ with ‘confidence statements’ attached, rather than a single number. There is sometimes a reluctance to explain budgets in this level of detail, for fear it won’t be fully understood. However, it is vitally important that decision makers have a robust understanding of statements, such as ‘there is an 80% confidence the project out-turn cost will not exceed £700m’.

Another major cause of cost overruns is a lack of accountability on many mega projects. Whether due to a tendency to over-optimism or a straightforward flaw, such as an inaccurate risk assessment, it is not unusual for major problems to arise when mega projects are nearing completion. With project directors changing posts regularly, there can also be a lack continuity and commitment to resolve these late-stage issues. This lack of accountability can only really be addressed at industry level, by creating the right incentives and rewards to retain skills and encourage the right behaviours from start to finish.

Appointing key individuals to take responsibility for learning lessons would also help to improve project delivery and encourage knowledge-sharing from one project to the next. Currently, lessons  learnt workshops can be allocated to almost anyone in the project’s risk or quality management teams, but without metrics to score the effectiveness of these sessions, they are unlikely to have much effect.

Greater use of risk management audits at each gateway could help to keep projects on track. Typically conducted by specialist consultants or government departments, these audits can provide reassurance to the project team; ensuring that the business case set at the start of the project is still viable and that all individual risk factors have been identified and mitigated appropriately.

When it comes to mega projects, none is exactly the same as another. This can make it more difficult to learn lessons simply by transferring best practice. However, with greater accountability and a commitment to raising risk understanding, it is possible to improve the industry’s record at completing projects on time and on budget.

Andrew Cullis is a risk analyst at risk management consultancy, Equib.

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