22
infrastructure
investor
may
2014
What are the challenges and risks that dif-
ferentiate mega-projects?
CD:
Mega-projects – which we usually
define as projects exceeding $1 billion in
cost – bring unique challenges. The risks
in these projects are not merely scaled up
in a linear way from the cost and schedule
overruns that often plague smaller capital
projects, but increase exponentially for a
range of reasons.
The first reason is complexity. Very
large capital projects are often executed
in difficult geographic locations such as
an airport in a congested urban area or
an oil and gas development in the Arctic.
Such projects often also feature first-of-a-
kind (FOAK) technologies such as new
nuclear reactor designs. Because of their
scale and risk, mega-projects are often
pursuedas joint ventures to spread the risk
andoftenhavemultiple stakeholders. This
adds considerable complexity in decision
making and governance on the projects.
The second reason is that the scale
of a mega-project creates a multiplying
effect with respect to systemic risks and
project inter-dependencies. For example,
a schedule delay caused by the lack of a
critical piece of equipment is often driven
by a root cause such as competition with
other large capital projects for the same
equipment. This becomes a systemic risk,
increasing costs anddelaying the schedule
throughout the project.
The third reason is excessiveoptimism
on the part of those undertaking the pro-
ject. These are often people who have
executed many smaller capital projects,
often with a good success rate, who view
a mega-project as merely a scaled-up ver-
sion of something they have encountered
before. This leads to insufficient advance
planning and analysis.
For example, far toooften the technical
complexity and schedule pressures com-
bine to lead projects to start construction
without detailedengineeringhavingbeen
completed. Moreover, an insufficiently
robust risk management programme
inhibits management from anticipating
challenges, redeploying resources to miti-
gatepotential occurrence, anddeveloping
common sense back-up plans for certain
risk exposures.
What are the factorsandcapabilities critical
tosuccessfullydeliveringmega-projectson
time and on budget?
CD: There are four critical elements to
successfully deliveringmega-projects. First,
undertaking sufficient advance planning
and analysis is critical to understanding
where risks to cost and schedule lie. Suc-
cessfully executed mega-projects feature
not only robust schedule and budget
development but also theuseof simulation
techniques suchas 4Dor 5Dmodelingand
probabilistic analysis of cost and schedule.
These projects often also employ physical
simulations suchas theuseof dry-runs and
mock-ups for critical stages of construction.
Second, successfully executed mega-
projects create a unified consortium of
owners and constructors with the right
incentives and alignment around shared
goals. No contract – no matter how com-
plex–will be able toanticipate the changes
and challenges that will occur over the life
of a mega-project so the working relation-
ship matters more than the contractual
protections that are envisioned.
Third, effective governance and deci-
sion making are essential in these large
multi-year endeavours in which many
unanticipatedchanges andchallenges will
occur. This is especially true in light of the
organisational complexity that is often the
casewithmega-projects that havemultiple
owners, constructors and stakeholders.
Fourth, a robust risk management
programme institutedat early stages of the
project andcontinually revisedandrefined
throughout the life of the project, should
be the primary means for understanding
major drivers of cost and schedule uncer-
tainty and for developing and executing
mitigation strategies.
Think a mega-sized infrastructure project is simply a bigger version of a
commonplace project? Think again.
Christopher Dann
of Strategy& explains why
you need to be prepared for every eventuality
Fighting against optimism
m e g a
-
p r o j e c t s
Christopher Dann
RISK
