Scope and cost creep are probably the most influential factors in project cost/time blowouts, and yet there are effective ways to minimise the risk of creep at the very start of the project.
Scope and cost creep usually have their genesis in one or more of the following elements:
- Lack of recognition of cost/time escalation and risk;
- Incremental physical additions to the project deliverables;
- Limited original scoping and estimating accuracy; and
- Progressive escalation in the specifications.
Many projects have their projected cost and time adjusted legitimately, but still suffer unjustified criticism and loss of reputation. Some projects fail to recognise and respond to cost and time implications, and then receive criticism that is probably well justified.
Physical additions include extra deliverables and extra constraints progressively added to the project task such as extra floor space added to a building, increased IT user requirements, extra amenities added to infrastructure, or the imposition of external constraints, without associated cost and time recognition.
The original scoping and estimating accuracy can vary significantly between projects, but importantly it needs to be recognised that the original scope definition and costing have usually been performed prior to the business case, and their accuracy depends on the level of design achieved at that time. Usually, the early design is conceptual, and cost estimation is based on historical grossed-up unit rates for similar projects. Consequently, significant risk contingencies may need to be applied at this stage.
Escalating specifications include the progressive ramping up of minimum acceptance standards for materials, systems, manufacturing, storage and transport, again without cost and time recognition.
If left unchecked, much of this escalation will occur in the period between the acceptance of the original design and costing that underpinned the business case and project development plan, and the issue of the detailed design for construction or system build. Any further escalation during the build phase will most likely be caused by ambiguities that were ignored or missed earlier or latent conditions for which insufficient contingency was adopted from the outset.
The critical drivers associated with minimizing the occurrence and/or impact of scope and cost creep include:
- Project governance and management structure;
- Key stakeholder management;
- Balanced business and technical influence;
- Project management methodology;
- Realistic risk contingency provisions;
- Risk-based planning and investigation; and
- Understanding of, and exposure to, progressive earned value.
These are discussed in turn below.
Project governance and management structure
The design and adoption of an effective governance and management structure is fundamental to the project. The structure must be relevant to the project, clearly identifying roles and accountabilities. Some important considerations must be satisfied:
- Who is the project sponsor, and who is the beneficiary?
- Who holds and approves the funding?
- Who has ultimate accountability for technical standards?
- Who does the project manager report to?
- Who has ultimate accountability for delivery?
- How are internal and external stakeholders identified and engaged with?
It’s important to remember that the PM’s role is to deliver the project successfully, and not to invent project content or make arbitrary scoping and specification decisions. Accountability and decisions regarding project funding, scope and specifications are the role responsibility of the sponsoring organization, communicated via a project governance framework to which project management activity should be ultimately accountable.
The PM may have to assist the project sponsor to develop an effective project governance framework, identifying the ultimate accountability chain, and the key corporate players who have legitimate accountability for funding, scoping, legal support, communication and technical compliance.
Whilst the existence of a corporate steering committee or similar may sometimes appear to be a burden from the PM’s perspective, if the project starts to experience difficulties, especially with stakeholders, then the governance framework will be of immense value to keep the project on track.
Key stakeholder management
The development of a relevant and detailed stakeholder management & engagement plan is an essential first step in project delivery management. The details of the stakeholder management plan should then manifest as a structural feature of the project by the formation of a working group or other communication method.
Key internal and external stakeholders must be acknowledged, listened to, and responded to as appropriate, and importantly those stakeholders must perceive and believe that their contributions have been acknowledged.
The role of the stakeholders becomes vitally important if any changes are contemplated – to scope, cost and/or time. Their response to proposed changes will represent an effective proxy for the wider community and may influence the project delivery and marketing approach.
If changes to cost and time are identified, then it is vital that all of the key stakeholders recognise the need for the change, endorse it, and are prepared to advocate for the change within the organisation and also the wider community.
Balanced business and technical influence
A peculiar feature of some organisations is the propensity for technical experts to dictate minimum technical specifications without challenge from elsewhere. If left unchallenged, a technically complex project may suffer from the impact of rampant technical enthusiasm on multiple fronts, each contributing incrementally to increased cost and time.
An effective balance to unchecked technical aspirations is the inclusion of a corporate business manager whose role is to challenge technical and scope matters from a business perspective, generally on a relative basis, and to drive decision-making always from an incremental value viewpoint, as well as reference to the available budget.
This also raises the issue of minimum “whole of life” (WOL) cost which is often stated as a tender conformance policy by the owner. The existence of a WOL policy is an open door for the enthusiastic ramping up of technical specifications. In addition, for a project that is being tendered in the open market, the WOL concept is fraught with difficulty, because usually, the owner has not stated what WOL actually means! Tenderers are still obliged to tender a competitive price which is unlikely to include a price premium reflecting a promise of long term savings over the life of the asset.
In addition to the inclusion of a business manager, the project may also use value management techniques and workshops, attended by the appropriate balance of people, to reach a position on scope and technical changes.
Project management methodology
A well structured and communicated project management methodology will ensure that the events that usually underpin potential scope creep are identified and managed early within the project management framework, and without exposing the PM to unnecessary personal risk.
All informal pressures to increase the project scope or to ramp up the technical specifications need to be referred to the relevant functional manager, or ultimately to the project governance team for resolution.
The PM should always work within the scope and specification agreed by the project governance team, which may, of course, vary over time if endorsed by the organization.
Realistic risk contingency provisions
As with WOL discussed earlier, the application of an appropriate risk contingency is often underplayed.
The realistic application of risk contingency is important right from the project outset. The original estimating process will likely have been based on low scope definition, and a conceptual design. Accurate costing is unlikely to occur until much later in the process, once detailed design has been completed, and this may well be by the tenderers, not the owner.
The owner may well include a suitable risk contingency in their budget estimating process, but how does this contingency survive in a highly competitive tendering market? Chances are that tenderers will minimise their estimate of the risk contingency in an effort to keep their price competitive, and hope that they will be successful in a subsequent variation claim should that risk eventuate. A successful variation claim will contribute to project cost creep, whereas an unsuccessful claim may adversely impact the contractor’s margin, and even put project completion at risk.
Also consider the impact of “optimism bias” which may operate to cause project managers and others to underestimate the probability and consequence of identified risks.
Consider also the business ethics where the owner has factored into the budget a realistic risk contingency, and yet it is believed that the successful tenderer has minimised the risk contingency to remain competitive. Is it entirely reasonable that the contractor should bear that risk, or should it be shared, or even excluded?
One solution is for the owner to bear responsibility for a particular risk, and identify a provisional sum that will activate in the event that such a risk eventuates, and be drawn down on the basis of demonstrated costs. That provisional sum is then included in the project budget estimates.
However great care needs to be applied in the design of, and subsequent evaluation of claims against a provisional sum, as some contractors may attempt to load their provisional sum claim to lessen the internal cost impact related to other claim items. There are techniques that can be applied to minimize such behaviour, and these would need a separate discussion to explain fully.
Risk-based planning and investigation
It is not sufficient to identify and cost risks and to provide an impressive risk register. You actually have to do something about these risks! Again, it is insufficient to believe that you have treated these risks adequately by writing a plan or procedure!
The key point here is that the owner and PM need to manage identified project risks both by:
- Designing out key risks by appropriate planning, investigations, and design/specification modifications; and
- Applying appropriate residual risk contingencies that are able to be preserved through the tender and contract award processes.
The decision about the extent of owner-initiated investigations worth applying to the project to mitigate risk can be aided by a fairly simple probabilistic analysis. That is, will the cost of investigations be significantly less than the probabilistic (likelihood x consequence) cost of that risk actually occurring? If so, then the investigations are probably worth doing, and the results shared with tenderers. The result of these investigations will inform the scope and specification for the project, and if the latent risk event was actually found to exist, then either the risk can be designed out, or identified as a legitimate estimated cost.
Similarly, the cost of more intensive early design for selected high-risk elements follows the same logic and again will yield a greater degree of cost certainty.
On occasions, there may be some reticence about spending project funds on investigations. However, if you were to ask the owner’s executive about their key financial expectations, usually the executive will indicate that cost certainty, not minimum cost, is their major worry. So, well thought out investigations will contribute to cost certainty and executive confidence.
Understanding of and exposure to progressive earned value
Earned value techniques are essential in managing progressive project cost, especially in complex projects with several work fronts.
However, in a classic lump sum or even a schedule of rates contract, time-based earned value information is managed by the contractor, and only available to the contractor. The owner simply receives the contractor’s cost claims based on an agreed pricing schedule, either conforming or as a variation claim. The owner may be blissfully unaware of what is happening “below the waterline”, and how hard the contractor is “paddling”.
Enlightened contracts require the contractor to tender a detailed costed work breakdown structure, and for the successful tenderer, as the contractor, to furnish progressive earned value reports for review between the owner and the contractor.