Three ways to avoid mega projects going way over budget
Big projects are almost always over budget, but in Australia they too often have massive cost blowouts. There are ways to fix this.
The controversial headlines surrounding Australia’s biggest projects keep coming: Fresh blow for snowy 2.0 as costs set to exceed 12bn budget and War-driven cost surge threatens to blow out Victoria’s ‘big build’.
Victoria’s North East Link road system is running approximately AU$15 billion over original estimates and the Melbourne West Gate Tunnel mega project, first quoted at AU$5.5 billion, is now at $10.2 billion and counting.
Inland Rail sits at the top of the tree in terms of cost overruns of public infrastructure mega projects. From an initial estimate of AU $4.7 billion in July 2010, the project is now estimated to close more than $31 billion.
According to Deloitte Access Economics’ Investment Monitor, the latest report lists 13 publicly funded infrastructure projects valued at $10 billion or more, for which latest cost estimates have blown out by around $130 billion.
To the average punter and to the experts, these figures seem astronomical. And the impact of these costs blowouts on future budgets can not be understated.
But cost overruns on mega projects are predictable and normal. The historical cost overrun of rail and tunnel projects is 39% and 37% respectively according to research by Bent Flyvbjerg, a world leading expert in this space.
So the real question is how can avoid the next wave of mega projects in Australia, like Victoria’s Suburban Rail Loop, the Olympic Games in Brisbane and the High Speed Rail, avoid massive cost blowouts?
Get the board and team right
The first lesson is to involve people, including those on project boards, who have deep proven experience delivering mega projects. In a classic example of what happens when you don’t, the Schott inquiry into Inland Rail began with a pointed finding that ‘the Board and its Sub-Committee do not have adequate skills to oversee this project.’
Too often, appointments go to people with the right connections, rather than the right skills. There is also limited industry training, research and forums targeted at improving these mega project delivery skills.
Targeted professional development that is specifically designed for complex environments can support those working on mega projects to develop the skills required, including governance, project management and leadership.
Investment in upskilling the people who govern and deliver mega projects can deliver a powerful return on project outcomes.
Fix the pricing game
One of the fastest ways to get mega project delivery teams working towards opposing goals is to use a lump-sum contract price – where the total cost to deliver the project is agreed upfront. That’s attractive to those who finance these projects, but it triggers fierce competition to win the project on price and the paying government will always be tempted to take the lowest price offered by the market.
For the winning contractor, the game then becomes all about finding ways to move that price up and to avoid being blamed when anything goes wrong. What is actually best for the project goes out the window.
Ironically, a fixed-price contract worsens the risk of cost overruns because contractors focus on protecting their profit margin, while the government and other project owners focus on shifting any risks that emerge to the contractors. All of which gets in the way of mitigating risks and adopting strategies that deliver more reliable outcomes.
Minimising this kind of commercial game was one of the reasons why Major Road Projects Victoria adopted an Incentivised Target Cost Model when they developed their Project Delivery Approach in 2020. We are also seeing a broader market shift toward collaborative contracts and incentivised target cost models where the project participants share the same incentives.
Know that you can’t know everything upfront
Projects of this grand scale and complexity are almost always over budget – a phenomenon that Flyvbjerg calls the Iron Law of Megaproject Management. The Iron Law is driven by the formidable political, financial, architectural, technological and, more recently, the ecological factors which drive projects of this size and scale coming to market.
The odds are that less than one in 10 mega projects will come in on budget.
Australia is a mature, sophisticated market capable of delivering complex mega projects, but we continue to be unduly optimistic about original project budgets and delivery strategies. We assume projects can be fully scoped, understood and priced at the outset when the harsh reality is that projects with billion-dollar plus budgets and five-plus year construction times face unpredictable futures which need to be exceedingly well managed.
We won’t get better outcomes when we deliver mega projects with demands for more ‘corporal punishment’ or from politicians who insist that projects won’t go over budget on their watch.
Neither to we get better outcomes by trying to convince ourselves that we can confidently predict the cost of mega projects, which we do over and over again in our business cases.
Instead, we need to study and apply the evidence around what does deliver best-in-class outcomes on mega projects.
This is critical in Australia where we have shifted from having one or two mega projects in market at any one time 20 years ago, to now having dozens on the go at the same time. This appetite for mega projects is not going to fade now that we built a market of contractors, financiers, lawyers and consultants ready to service mega projects.
Bu focusing on building experienced teams, aligning incentives and adopting procurement and governance models that are designed to handle uncertainty and change, we have a chance of getting better than average cost overruns.
We can accept cost overruns, but not massive cost blowouts.
Kiri Parr, Senior Fellow, Melbourne Law School, University of Melbourne; construction industry advocate and independent consultant.