How can we narrow the gap between project estimates and actual cost?

The Jubilee Line Extension (JLE) cost £3.6bn, a £1.5bn cost over-run, a crisis, now all but forgotten. Miles Ashley, Chair of the steering group for ICE's latest paper on forecasts vs outturns, discusses the steps we need to take to improve public perception of major projects. 

Westminster Tube Station platform, part of the Jubilee Line Extension works. Image credit: Adrian Pingstone/Wikimedia Commons
Westminster Tube Station platform, part of the Jubilee Line Extension works. Image credit: Adrian Pingstone/Wikimedia Commons
It’s been disappointing for all of us in the industry to see so much recent talk about major infrastructure projects focusing so heavily on monetary costs. The benefits these programmes bring to society is enormous, but sadly, often overlooked in the short-term. 

Major projects are consistent; they're universally complex and once commenced are subject to significant unforeseen change resulting from technical, political, and stakeholder challenges, with inevitable consequences.  

The UK is certainly not alone in its over optimism. Nine out of 10 projects around the world with a value of over £1bn exceed budget; there seems to be an ever-present issue of the gulf between initial forecast estimates and final outturn.   
 

ICE's forecast vs outturns report

I recently chaired a steering group for the Institution of Civil Engineers. This group of senior directors (drawn from clients, contractors and consultants) was tasked with producing a report investigating the ways the infrastructure community and government can work together to narrow this gap.  

This report looks at case studies and explores how we can work together to create healthier expectations and attitudes towards management of major projects and instill a more productive way of working.  
 

'The public don't share our cost obsession'

Surprisingly, perhaps, the research showed that the public don’t share our cost obsession.  

A survey conducted by YouGov for this paper asked the wider public what they thought was the best measure of success.

A mere 3% of respondents thought low overall cost was most important – this compared to 30% who placed highest value on how the project regenerated the community, and 27% who placed it on having infrastructure that was reliable and cost-effective to maintain in the long-term.  

The public want our politicians to talk more about benefits and less about cost. 
 

How can we do better?

Even when major projects are completed within budget, the complexities of such an endeavour result in significant cost increases at contract level, typically of the order of 50% and often more.

Our procurement approach often fails to meaningfully engage or reward our contractors for the value that they can bring to the outcomes we need from our infrastructure.  It also encourages unrealistic low price bids based on immature information, and overpromising on risk transfer, resulting in commercial tensions which commonly distract us from creating the integration and teamwork required to overcome the complexity we face.   

Increasingly, infrastructure owners are changing that business model and seeking longer term relationships with their supply chains.  

This enables them access to the benefit of ongoing supplier advice, creating better value, while enabling the commissioning of work at a point in time when the parameters of delivery are better understood. Enhanced benefits and increased cost certainty.  Project 13, a model for this new approach, promoted by ICE, has now been formally adopted by a number of our major infrastructure owners, a sure sign of progress and a cause for optimism. 

In looking at how to better encourage fair and accurate estimates, which asset owners can have more trust in, this report aligns itself with principles in the government’s Outsourcing Playbook.

ICE argues that the principles it sets out should be required for government infrastructure owners when procuring contracts.  

Another area that could bring huge change to the sector is the adoption of “should-cost” modelling. The more due diligence that is done early on, establishing what a project should cost, based on rich historic data, the less we are likely to see major cost overruns.  

Having asset owners employ sufficient independent assessment to help them understand the true cost of their project will give them greater knowledge and ability to make more informed, and realistic choices when developing effective supply chain relationships.   

For contractors, this offers not only the opportunity to escape the current low price tender model but more importantly, to demonstrate all that they can bring in driving real beneficial value for their clients and wider society.

That, after all is the purpose at the heart of civil engineering, and what many of us, including new entrants to the industry, wish to be a part of.    
 

'We must be honest'

Admittedly, such change will not be achieved overnight. This will take time and commitment, but the argument is being won and incentivising benefits mean the procurement process will be fairer and more effective. But it’s not just the technicalities of the procurement processes that need to change.  

We have a responsibility to more credibly articulate the benefits that infrastructure brings to society and the transformational effect it has on people’s lives. Re-balancing the narrative between costs and meaningful benefit will provide us a more compelling engagement  with our ultimate customers and the politicians that serve them.  

We must be honest about the complexity and risks we face in creating infrastructure, and displace the reputation of the industry from one that overruns and overcharges to one which fundamentally benefits and enables the society it serves.  

That will require the courage to adopt a new vocabulary, new measures of performance and a new model, but that's a journey that's already begun. 
 

 Download the report

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