November 1st, 2018

Why should executives and project teams care about predictability? Mark White, Senior Vice President at Hexagon PPM explains why predictability is important, why the engineering & construction industry’s fixation on outcome variance is misguided, and how accurate AND early project forecasts can drive down project costs and schedules.

 

Transcript
The construction and engineering industry has been panned for a long time because of its poor predictability, poor productivity, and way behind in improvements in productivity and technology adoption. This leads to a continuous problem of project overruns, cost and schedule overruns, so let’s define predictability.

Instead of focusing on the outcome, it’s about when the outcome was first known—how early in the project cycle it was first known. The industry has been transfixed on outcome variance. That’s the difference in the end between the original budget and the total cost, the actual cost. If that’s within 20 percent, not such a big deal, but the fact that that variance typically becomes known very late in the project becomes a big surprise.

Executives don’t like surprises, so when those things happen it undermines the credibility the organization, of course, undermines the business case. They are reporting in many cases to shareholders. A business case for a facility, let’s say, it’s a billion-dollar facility and the project end up costing two billion. When that information has to be reported to shareholders, there’s inevitably going to be a hit on the share price.

The chances that people get the opportunity to perform the next project are diminished. For contractors the chances that they win the next big job with a with an owner-operator are diminished.

In terms of transparency of reporting which is critical for every executive, this timeliness of reporting is very important.

These are significant consequences for owners and EPCs and contractors alike.

As an owner, you’ve really got to have a good up front estimate and then get into a practice — with underlying capability: technology, people, process — to make sure that you understand the real accuracy of the initial estimate, and flow that through the lifecycle. Constantly updating the forecasts, and again, being transparent about reporting those forecasts. Not just leaving it to project teams to make a decision and hoping that things will start to get better.

They know that they’re overrunning the contingency. They know that the forecast is going to increase, but they refuse to believe it, or they don’t like to report bad news.

So they just keep on hoping that things turn around 50% through the project, 60…70, and eventually they just can’t hold the floodwaters back anymore. The dam breaks, they’ve got to report that bad news, and of course, that’s where the pain of optimism bias kicks in.

By the time something’s in the construction phase, it’s way too late to make any of those corrective actions. This is the real benefit of now measuring a timeliness of forecast predictions, not just the outcomes. You have ample time to take corrective action. That in effect should reduce the final cost.

It’s really about credibility. You could even say “career path.” What do you want to be known as? Somebody who delivers projects effectively, on-time and on-budget, or somebody who habitually is late and overbudget by more than 20%. I think the former are more likely to be promoted and enjoy a healthier career and all the benefits that flow from that.

So, certainly the project teams wanting to progress of course in their company and in their careers should take this issue of timely forecast reporting very seriously.