What level of contingency is required to achieve the cost certainty goal in public infrastructure projects? For the public sector, cost certainty provides #stability and #predictability. It enables public decision-makers to evaluate options accurately and make informed Go/No Go choices. However, empirical evidence from existing literature highlights that the public #infrastructure projects often fall short in accounting for cost increases incurred during construction phase mainly due to underestimating the required contingency percentage at the time of investment decision [1]. For example, in the study conducted by Love, Peter ED, et al. (2017) the mean cost overrun of 67 public infrastructure projects reported 23.75%. This indicates that the "traditional deterministic contingency estimate between 2 and 5% which is often applied at the award of a tender would have obviously been inadequate for the sampled projects" [1]. Thus, given the unequivocal need for cost certainty, a much higher level of contingency at the time of awarding a tender may be required considering risks and uncertainties involved in the project. For instance, as shown in the attached Figure, the accuracy of an estimate improves as more information becomes available but in reality, this could be fallacy, especially for schedule driven projects. When a project goes to tender, drawings and BoQs may be inaccurate, incomplete, and/or seldom available due to many factors including level of scope definition, availability of design information (e.g., geotechnical), errors and omissions in documentation. Therefore, it is necessary to have a sufficient contingency allowance in place accounting for possible cost increases may incurred during construction phase. Accurate estimation and realistic allocation of cost contingency play a pivotal role in mitigating the risk of future cost overruns. As stated in the paper "If change is not embraced, then cost overruns will continue” [1]. Therefore, identifying potential causes of future changes during the design development phase and incorporating their impact into the contingency estimate is a crucial step toward achieving cost certainty in public infrastructure projects. In your view, and what are the implications to achieve cost certainty goal in public infrastructure projects? Feel free to share your thoughts or any additional insights! Source: [1] https://lnkd.in/gU3XTBxK #decisionmaking #uncertainty #riskrmanagement #infrastructure #cost #costoverrun #construction #designengineering Hatch Metrolinx Infrastructure Ontario Ontario Power Generation The Canadian Council for Public-Private Partnerships
Currency of the contract is another black hole. Probably a make-or-break hole. Recently in one of a public project in Karachi, the contractor refused to continue work because the currency of his contract wasn't able to cope with nearly 150% increase in the currency conversion. Generally the employers feel that by signing a contract on a value without giving any regard to - change of regulations and standards (eg green, sustainable) - abnormal currency fluctuations - political and economic turmoil/ peace of the country or the region - inflationary pressures they can offload their risk. But, in my opinion, without success. Generally, the inherent causes (design, productivity etc) are not the driving factors to put the cost out of the chart but factors (list is not conclusive though) as mentioned above.
Some projects fail to meet budget due to the failure of project participants to distinguish known unknowns (and their foreseeable consequences) that they can't bear to think about from actual unknown unknowns. Actual black swans don't match the popular definition of a black swan. The way the story is usually told, folks didn't (couldn't!) imagine a black swan before they encountered one. In reality, people in one part of the world imagined the black swan, and confidently said: "We've never seen one, so they can't exist!"
Perhaps to achieve cost certainty, the implication is a/the Client needs to let go the “schedule driven” mentality and set everything to budget e.g., Design to Budget, Procurement to Budget, Construction to Budget. Design and Build contracting model appears doesn't work in combating the overrun. I still believe on Traditional.
It seems the cost overrun might be due to the assumptions behind the 5% (or whatever percent) contingency. These assumptions likely included good design quality with minimal scope changes and stable price levels. While we can influence design quality to some extent (even though projects are often rushed), we have little control over market prices. These unpredictable factors, or risks, make it difficult for any construction project, especially long-term ones, to stay strictly within budget.
The figure you have produced only works where the procuring entity spends enough time in the pre investment decision stage developing quality specifications and thorough designs and making complete scope decisions. The more deferred decisions and scope uncertainty the higher the contingency amount needs to be. I have yet to meet a public sector client who are willing to pay for four cost checks pre tender - and that right there is the problem. The unwillingness to spend time and relatively small amounts on professional fees, to secure a well planned project that can be delivered on time and on budget.
Is there any big difference of infograohic for public systems scenario ? (Numerous digit $ value fixed scope fixed price contracts when actually get developed say 1200 use cass RFP, MVP - minimum viable count, sizing then gets clear when finer requirements get finalised which often is subsequent to actual discussion or prior) . Often find below in public systems (softwares, generative, cybernetics)
Why base estimate to contract value cost estimation forecast getting smaller? Shouldn't it the way around, due to additional work scope to be added once it is detailed up? Based on current practice, the more u detail it up, the lower estimate margin will be? Doesnt make sense.
Teacher & Coach in Projects and Procurement
10moMoe Roghabadi. The graph, and abstract to Love et al 2017 highlight another issue. Conflating 'project' and 'contract'. I never presented a project estimate that was the value of a main contractor bid. And the post-contract growth suggests the pre-contract design and planning was nowhere near the levels needed to realistically claim those estimate accuracies. If they were why would costs increase due to documentation errors and scope change and rework. To say nothing of the need to separate owner scope related change from the others. Then we have the inherent inefficiency and risk that comes with using a fixed-price main contract along with a design-bid-build sequence. It is ironic that the reasons often given for using this approach are "cost certainly". Two observations. Firstly the evidence seems to show we rarely get cost certainly, and then as a tax payer I would prefer them to focus on value-for-money, ie minimising absolute cost and maximising speed. Neither of which this approach achieves. What they do is give a CYA defence when things go wrong - "We were following conventional practices. What more could we have done?"