Large scale projects
What is different?
Final Report of the large projects reform commission
Effective cost and risk management is critical to the success of large infrastructure projects. Significant cost overruns in major projects show that risk management is not given the importance it should have. In order to measure and manage current costs and schedules against established targets, it is necessary to assess risks in a transparent manner and to take them into account appropriately.
The first paragraph is certainly something that anyone reading this will have had in front of them in some form or another. But why does the feeling arise that nothing changes and that we - to borrow Einstein's phrase - do the same thing over and over again and still expect different results?
In Germany, the Large Projects Reform Commission presented its final report from 2015, where the implementation of systematic risk management in project execution was a key recomendation.
The use of sequential cost components aims to create cost transparency by specifying a clear cost structure that can be applied from the requirements planning stage through to construction execution.
The most significant cost components are:
Base costs: costs if "everything goes according to plan", without reserves for risks or approaches for advance valorization (price increase)
Risk costs: Costs resulting from hazards and opportunities that may occur but are not certain to occur (probability of occurrence).
Escalation: costs resulting from the forecasted price increase (future inflation).
Cost components in the course of the project according to ÖGG guidelines „Cost Determination for transportation infrastructure projects, taking relevant project risk and uncertainty into consideration“:
During the planning phase, there is usually a high risk potential, but no additional costs yet, which are the consequence of risks that have occurred. Furthermore, the projected costs for the advance validation are set depending on the execution time frame (e.g. one year or ten years).
In the course of project execution, the risk potential is reduced; at the same time, additional costs are incurred. The advance valorization decreases with shorter intervals to the end of the project. After the conclusion of the contract - if escalation clauses have been agreed - escalation costs occur (advance valorization occurred).
Upon completion, there are no more uncertainties. The actual costs consist only of the base costs (B= B0+A) and the cost of the Scope creep.
Interaction of RM, project cost controlling and budget planning
Risk management presents a probabilistic total cost forecast at a specified target date with transparent reporting of uncertainties. This forecast is used to validate the budget.
A budget usually does not describe the costs of a project. It is much more a fixed amount that is (politically) allocated for the realization of a project, for example. The budget and the realistic costs of a project can differ greatly.
Developing a cost forecast purely on the basis of a budget is not effective.
Validation of a budget (here P80)
The budget is then compared to the forecast from risk management (distribution for costs or deadlines).
It can be seen that there is a probability of 80% (P80) that the budget will be underrun. On the other hand, there is a probability of 20% that the budget will be exceeded.
The P-value - or value at risk - specifies a value (e.g. € 1.0 million) within a probability distribution that will not be exceeded or fallen short of with an assigned probability (overrun or underrun probability).
Integral analysis of costs, deadlines and risks
The conventional approach in project management of considering costs, risks and scheduling as independent does not take into account the dependency of time and costs (Silo approach). In addition, forecast values are used as the basis for decisions without any information on uncertainties.
The integral model connects risks to schedule operations in order to account for potential construction time delays as well as the change in the critical path. The result of the simulation shows the deviation from the target date. The costs from potential construction time delays are also included in the overall result.
The result of the analysis is shown by means of S-curves according to cost components.
Starting from the deterministic base costs (in the example € 100 million), the blue curve shows the base costs including quantity and price uncertainties. The risks (red curve) and the cost estimates for escalation are added to this (green curve).
To achieve a budget certainty of 80%, the budget would have to be € 136.2 million.