Nostradamus for Projects (Part I): Building Predictability into your Enterprise

Predictability

Why is it the construction industry lags other sectors when it comes to productivity? Why are cost and schedule overruns the norm for engineering and construction projects?

The answer to these questions is complicated, as there are many factors that affect project outcomes. However, there is one critical factor that is often overlooked, but has a huge impact on returns and margins – Predictability.

What is predictability and why is it important?

Predictability is simply defined as knowing the outcome of an event as early as possible. For construction projects, we mostly focus on cost and schedule predictability. In order to have predictable projects you need early AND accurate forecasts.

To illustrate, consider projects A and B.

Predictability Project Comparison

 
  • Project A) Find out about a 20% overrun 20% into the project duration
  • Project B) Find out about a 20% overrun 80% into the project duration

Imagine instead your organization had highly predictable projects, like Project A. If you learn about an overrun 20% into the project duration versus 80%, you have ample time for course correcting action.

Keep in mind, this example is just one project. If you multiply this issue by hundreds or thousands of projects across your organization, you begin to see how important predictability is.

Construction Industry Institute Quote

An organization’s inability to accurately predict cost and schedule outcomes massively impacts the bottom line and management confidence, to say nothing of investor confidence. Given Wall Street speaks the language of predictability, executives in our industry must also attain fluency in predictability. Again, early knowledge of outcomes enables project teams to address project performance proactively to reduce cost and schedule variance.

Influencing Cost Over Project Lifecycle

 

You cannot eliminate all surprises, but the quicker you identify them the better chance you have to take action. Simply put, improved predictability breeds better project control and better financial outcomes.

What causes low predictability?

Tasked with Improving the Predictability of Accurate Project Outcomes, the Construction Industry Institute (CII) released findings  from its Research Team (RT) 291.

The research revealed that there were distinct and identifiable practices that affected predictability of projects. The research team categorized these practices as follows:

  1. Human behavior and organizational culture
  2. Project characteristics (project complexity, external influences, market conditions, project team)
  3. Forecasting practices (forecasting methods, forecasting data, contingency management, reporting)
  4. Management processes (project planning & execution, contracting, risk management, change management)

Somewhat surprisingly, the single most important factor in project overruns was found to be the people element, including a mix of leadership, competency and human behavior. RT-291 found evidence of systemic delays in reporting accurate cost and schedule variance, otherwise known as “the hockey stick effect,” named after the typical shape of curves depicting forecast change over time.

If you think about it, this makes sense.

Project teams are typically measured based on the outcome of a project i.e. the deviation of actual costs and schedule from planned. With outcome-centric evaluation, project teams will not feel compelled to become better predictors. Project managers express that the prediction of an overrun at completion raises concern, scrutiny, and suspicion from the home office. Therefore, project managers tend to adopt an optimistic and biased view toward the report of deviations with the hope that future corrective actions will effectively readdress performance. As a result, deviations tend to be reported very late in the project execution process (Back and Grau, “Four-casting for early predictability”).

Achieving high predictability

In order to increase the predictability of projects, executives must first and foremost address the human factor and culture within their organization. By institutionalizing and incentivizing proactive behaviors no longer driven by outcome-centric Variance Analysis but instead by Predictability Analysis.

CII introduced the Predictability Index to help organizations do just that. The predictability index measures a project team’s ability to accurately and timely predict cost and schedule performance by assessing three core competencies:

  1. Timeliness of forecasts
  2. Accuracy of forecasts
  3. Deviations at completion

CII has found that when organizations implement performance measurement based on predictability, deviations are reported earlier, root causes of issues can be identified sooner, corrective action can be taken to mitigate risk, and resources can be optimized across the organization.

Furthermore, organizations that measure and assess predictability are able to utilize predictability as a benchmarking metric. This allows them to analyze and track predictability against variables such as business unit, project size, geographic sector, team leadership etc. Additionally, the benchmarking of predictability performance is also perceived as a reinforcing message within itself, promoting behavioral shifts in the organization that emphasize trust, transparency, alignment, and timely disclosure of project performance information (Back and Grau).

Technology’s role in predictability

It’s no coincidence that in addition to productivity and predictability, the construction industry also lags other sectors in technology adoption. Deloitte notes that Construction invests just 1.5%  of revenue into IT, less than half of the average for all industries. Further, KPMG reported  that two-thirds of surveyed firms don’t use advanced data analytics to monitor project-related estimation and performance.

This void of technology has contributed to low predictability in the industry, as executives lack visibility and transparency into the project level to properly incentivize and drive predictability across the organization.

There is hope, however, as digital transformation is becoming a critical business initiative for organizations in the Engineering & Construction industry. Many firms are increasingly utilizing technology to successfully deliver projects and achieve performance targets. Digitization can extend the reach of an organization, improve management decisions, and drive efficiency throughout an enterprise.

Another benefit of technology is its ability to help track, analyze, and ultimately drive predictability. Technology can directly impact many of the practices that CII identified as distinctly correlated to predictability:

Project characteristics – technology helps you manage complex projects more efficiently, promotes more effective communication and collaboration between project teams and management, helps mitigate the impact of external influences, and in some cases, software can help directly measure and assess project teams based on predictability.

Forecasting practices – utilizing one software solution as a central hub for project data can help improve forecasting, making sure forecasts are based on consistent, accurate, and real-time information. In addition, reporting can be done much more quickly, and with less manual effort.

Management processes – software solutions can help make project planning, execution, and contract management more efficient and effective. The correct software will also improve risk and change management, and make sure that best practices are standardized throughout the organization. Solutions that integrate management processes with project controls provide the added benefit of making sure project delivery is aligned with organizational strategy, and that all data is accurate and consistent across the enterprise.

Human behavior and organizational culture – there are some solutions on the market that can even help with the human behavior and culture aspect of predictability. Software that leverages predictability indices can help organizations measure, track, and benchmark based on predictability. Shining a spotlight on predictability allows management to reward it, thus helping drive out “optimism bias.”

A digital transformation of your enterprise provides a great opportunity to increase the productivity of your organization. And since predictability is such a critical part of project and organizational success, it is very important to consider predictability as part of your digital transformation strategy.

For more information about how to deliver highly predictable projects as part of your digital transformation strategy, contact us.

 

Contact Us

 

 


10 Reasons Why Your Projects Aren’t Improving

With today’s increasingly tight budgets, organizations need greater visibility into project and program performance in order to ensure that funds are being well spent. As a result, Project Controllers need to deliver timely and accurate information to pro-actively shape business decisions.

EcoSys regularly meets with project controls professionals across a variety of industries and the cost controls challenges that we discuss are common and pervasive. These challenges emerge from various sources ranging from organizational readiness to the design of processes and systems. Let’s take a look at our view of the top 10:

Number 10: Cost accounting, not cost analysis

A growing frustration among project controls professionals stems from being perceived as cost “accountants”, finding that a great deal of their job consists of reconciling and ensuring that recorded data is accurate. Project controls should about be creating scenarios, planning and analyzing the data of a project, not counting costs. In essence, looking forward; not looking back.

Number 9: Budgeting and forecasting effectively

Most organizations do not have a consistent method for cost controls. This is not just a systems problem, but includes a lack of standards: do we have a standard for creating budgets? Updating forecasts? Do we execute these tasks consistently across the organization for similar projects? Are there standard benchmarks and measures for determining success? Generally, the answer is no.

Number 8: Getting progress data from multiple (sub)contractors

Attempting to pull together an integrated master schedule from many different contractors and/or subcontractors is a problematic task, especially on larger projects with involving potentially hundreds of different parties. Even gathering progress data, and ensuring accurate sign-offs from subcontractors can be difficult. The cumbersome nature of obtaining this data, compounded with inaccurate or irregular information, obstructs good reporting or analysis of a project.

Number 7: Integrating schedule and cost

Schedulers tend to work in terms of work breakdown structures (WBS) and activities, while cost analysts and finance use cost codes, transactions, and fiscal periods. Each side typically has different managers who are reviewing their data and schedules. Scheduling and cost are also often using different tools to report their data. Therefore, pulling information from both sides to provide a clear view of project performance has been a huge challenge.

Number 6: Aligning data between multiple source systems

In addition to schedule and costs aspects of a project, projects have to align data from different sources such as a time sheet system, asset management systems, procurement systems, etc. Many organizations ultimately use Excel spreadsheets to attempt to reconcile the data pulled from various locations. However, due to the complex nature of some projects, the result is often wrought with mismatched data and inconsistencies.

Number 5: Time and effort involved with reporting

An even bigger problem than pulling information from different sources is the time it takes to gather the information for reporting. The typical solution for gathering this information is a manual process, which is tedious, time consuming and prone to error. A cost engineer’s time is better spent analyzing reports rather than building them.

Number 4: Managing the customer relationship

Clients will often want to see cost and performance measurements in a manner that your organization does not currently provide. For contractors, these customers are project owners, but even internal customers such as executives or other stakeholder’s can add to this burden with ad hoc requests. We often see organizations focus much of their time and effort generating reports for the customer in the format they have requested. This diverts efforts from actually improving project performance, which would be the greater client “reward.”

Number 3: Accuracy of reports

Once the data has been collected and the format has been established for a report, you need to ensure that the report is accurate and understandable. For example, a summary report should be able to provide accurate details in WBS or costs and provide a level of clarity on the project.

Number 2: Insufficient resources for controls

There seems to be an ever greater demand for cost reporting, better planning and scenario analysis. In more complex environments, massive amounts of collaboration between different project stakeholders are necessary for success. This places a great deal of pressure on the limited project delivery resources of the organization. The challenge becomes having sufficient resources to provide detailed, accurate reporting in a timely fashion.

Number 1: Controlling changes

Managing changes within a project can be the most difficult aspect of cost management. While a budget may be set for a project, there will inevitably be a variation or scope change. Various questions arise due to changes: How did the variable affect the budget and the forecast? Were all changes accurately reported on? Does the current budget and forecast reflect the change? Compounded with other challenges (insufficient resources, disconnected data and systems, manual compilation of data), a mismanaged change can severely impact the accuracy of reporting and jeopardize the potential success of a project.

These challenges can seem like major obstacles standing between you and project success. Luckily there is a solution…technology. Modern Enterprise Project Controls solutions can help you overcome these challenges, providing a single source of truth to help keep your project on budget and on schedule.

Learn more by watching this webinar on Enterprise Project Controls, or connect with an expert to see how Enterprise Project Controls can benefit your company.


Project Cost Control a Rising Concern for Oil and Gas Megaprojects

Project Controls Imperititive for complex and often overbudget megaprojects

Project complexity is growing. It’s a truth we’ve seen across a multitude of industries as projects become more ambitious, take on new technological challenges, and command stratospheric budgets (where a $10 billion capital expense is no longer surprising and can be dwarfed multiple times over by the world’s very largest endeavors).

A recent Wall Street Journal article entitled, “Big oil companies struggle to justify soaring project costs,” corroborates this growing complexity and cites the difficulty in containing costs with megaprojects that span years and face ongoing market changes. Factors that are driving complexity and cost are diverse, but can include items like:

  • Exchange rate fluctuations as projects utilize multiple currencies which can also be distinct from reporting and home currencies.
  • Underlying economic conditions affecting the viability of projects – from commodity price volatility to changing regulatory requirements
  • Rising labor costs as competition rises for a limited skillset and increasing productivity becomes essential
  • The need for collaboration on projects amongst competitors, as multiple players join forces and pool resources to embark on these gargantuan projects.

The result is seen in megaproject costs soaring 50% to even 300% of original budget. The article quotes Gary Fischer who leads Chevron’s 120-person cost controls and contract management group. These projects “are very fragile and totally unforgiving” indicating why the department has tripled in size in its efforts to complete megaprojects on time and on budget.

Why undertake “Elephant Projects” of this size and scope then, you may ask? It’s a key part of the growth strategy of many of the oil majors looking to boost production to replace aging fields. It’s a calculated risk, however, given the long lead times between capital expenses and when the revenue begins to flow.

Major oil companies, once seemingly impervious to project cost overruns which had paled in comparison to revenues the projects produce, are now directly impacted by the sheer cost of megaprojects and their negative impact on near-term profits.

To combat the megaproject complexity, organizations are implementing procedures and systems that offset the risks of overruns and combat the factors noted above. The intent is to add visibility into project performance and allow for greater agility to address issues that lead to overruns before they grow into billions in added expenses.

 

DOWNLOAD OUR PRODUCT BROCHURE:
EcoSys EPC for Oil & Gas