Grattan Institute Reviews Major Project Overruns

by Dr Naomi Mathers
ICCPM Director, Industry Liaison and Member Services

On the 9th November 2020, the Grattan Institute released the report, The rise of megaprojects: counting the costs. This report considers the increase in megaprojects in Australia and some of the issues leading to their poor performance. In particular, it sounds a warning for an infrastructure-led recovery from the COVID-19 recession if they are not managed differently.

The need to manage megaprojects differently is a message ICCPM has been communicating since its establishment in 2007. At the time, it was the Department of Defence that was grappling with how to improve the performance of megaprojects. It was understood at the time that scale was one factor that increased project overruns but that this wasn’t the only factor. Small projects that had a high level of technical innovation, multiple partners or political influences were also underperforming. What resulted was a more nuanced understanding of complex projects, and the need for a different way of managing these projects.

Complex projects are not unique to any one sector. Although no two projects will ever be the same, there are lessons to be learned through sharing experience. The Grattan report provides an informative review of all public road and rail projects worth A$20 million or more and completed since 2001. Using the Deloitte Access Economics Investment Monitor to look at the final cost of these projects, they found that megaprojects are breaking records for cost overruns and that bigger projects overran their initial cost estimates more often and by more.

Note: Includes all public roads and rail projects costing more than $20 million that were completed between Q1 2001 and Q1 2020.
Source: Grattan analysis of Deloitte Access Economics Investment Monitor.

Through their analysis, the Grattan Institute identified some common factors that lead to project overruns.

Project complexity

Although the Grattan report doesn’t call it project complexity, it quite rightly recognises that scale alone is not responsible for these cost blowouts. “As larger projects have more interdependent elements, a setback in any one element can flow through to other elements. This cascading effect leads to blowouts that are likely to be larger, both in dollar terms and as a proportion of the project’s cost.” This interdependence is a key characteristic of complex projects and systemic risk management is needed to avoid this cascading effect.

This systemic view includes understanding the impact of issues beyond the project boundary. The Grattan report cautions against infrastructure as stimulus highlighting concerns about the capacity of the construction industry. “Even before the pandemic, governments were worried about the industry’s capacity to take on more work on top of the record quantity of works in general and megaprojects in particular that were under construction.” According to the International Monetary Fund, ‘project delays are longer if projects are approved and undertaken when public investment is significantly scaled up’ (IMF Fiscal Monitor: Policies for the Recovery Oct 2020)

ICCPM would add that complexity is greatest in large scale projects with a change objective. “Nation building” projects have greater public visibility and are often more emotionally charged. In addition to project complexity, these projects are subject to increased scrutiny and shifting political agendas.

Premature announcement

The report identifies cost announcements before governments were prepared to commit formerly as a particular risk. “Only one-third of projects had costs announced prematurely, but these accounted for more than three-quarters of the A$34 billion overrun.” When a project is announced early, this usually means its cost estimate is a preliminary and does not include a detailed engineering design or understanding of all project risks.

Without a rigorous and impartial analysis, projects can suffer from the “Conspiracy of Optimism.” The ‘Conspiracy of Optimism’ describes a situation where a number of stakeholders, each with their own priorities and unique worldviews, tacitly ignore the reality of a situation in order to gain approval to proceed with a venture no-one would sanction if the true outcome were known. ICCPM explored this phenomenon in the 2009 International Roundtable Series and the findings are still relevant.

The Grattan report observes that not only can this behaviour lead to overruns, it also distorts investment planning in the following ways:

  1. underestimating the costs of transport infrastructure can lead to over-investing in it relative to other spending priorities
  2. if governments misunderstand the uncertainty in a project’s cost at the time, they commit to it, their decision to invest in that project was made on an incorrect basis
  3. because unrealistic cost estimates are more prevalent for larger projects, governments are more likely to over-invest in larger projects.

We recommend the Grattan report to you as an informative case study of contemporary megaprojects, and a cautionary tale of what happens when project complexity is underestimated or mismanaged.

Note: Includes all public roads and rail projects costing more than $20 million.
Source: Grattan analysis of Deloitte Access Economics Investment Monitor.

As the number of megaprojects increase, we need to evolve the way we deliver these projects to align with the particular needs of complex projects. Project leaders need to be skilled in complex project management and project governance needs to be aligned with the dynamic, interconnected and highly political nature of megaprojects.

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