Late-running construction projects are an all too common occurrence. But how can contractors and clients minimise the risks of delays? And how can they manage these risks when they occur?
Let’s look at the three main reasons why projects fail to stay on time and on budget, according to a 2015 McKinsey report:
- Over-optimism and over-complexity
- Weakness in organisational design and capabilities
- Poor execution.
Examples include Boston’s Big Dig. An over-optimistic initial assessment of the road tunnel’s complexity led to a five-year delay and 190 per cent cost overrun. Meanwhile, Berlin’s Brandenberg Airport suffered from poor execution. With 150,000 defects discovered to date, it’s now seven years behind schedule.
What happens when construction projects are delayed?
The severity of the consequences of construction projects delays will depend on the type of project and funding arrangements. Here are a couple of examples:
Alaskan Way Viaduct Replacement, Seattle: The state-financed, $3.1 billion tunnel scheme is currently two years late, with $223 million of cost overruns – almost solely because of the breakdown of the tunnel-boring machine (TBM) in 2013. The contractors have borne the brunt of the costs, with significant liquidated damages due to late delivery, even though the TBM was insured.
The Shard, London: Privately funded projects can also fall victim to delay. A delay of 37 weeks on the fit-out of The Shard’s five-star hotel led operator Shangri-La to sue its contractor for £57 million to cover defects, delayed opening, damages and financing costs.
How to minimise delays to construction projects
More detailed planning, including engineering and risk analysis before starting construction, is an obvious way to mitigate the risk of delay.
As Deborah Hein, CEO at the International Centre for Complex Project Management, explains: “Problems often begin with over-commitment to rough concepts in their early stages.”
Additionally, strong project management abilities are essential.
On Heathrow Airport’s Terminal 5, BAA asked contractors to sign up to one design model and programme. It also instigated a ‘pain-gain share’ mechanism: if the project finished on time and on budget, they would all be rewarded with a share from the pot; if they were late, they missed out on bonuses.
This was supported by an owner-controlled insurance programme (OCIP), rather than contractors arranging separate insurances.
A collaborative approach of this type is more popular on large infrastructure projects, where the continued availability of the asset/network is of vital importance to the owner. There are many examples of this in utilities markets, particularly in the UK and Australia.
However, its application is likely to be limited for smaller, speculative projects, where price will remain the key consideration.
What to do when a construction project is delayed
When delays occur, the scale of the project normally determines whether time can be clawed back within the original schedule. The bigger the job, the harder it is to turn around.
There should be three key management focuses in the event of a delay:
- Analysing and dealing with delays as they occur
- Communicating with stakeholders – particularly if extensive liquidated damages or financial penalties are at stake
- Identifying where time can be pulled back.
Samsung Engineering’s contract for the world’s largest gas separation plant in Thailand was plagued by delays. But the contractor was able to make up time by sharing resources across contracts to improve efficiency; and integrating construction workers with operational staff to accelerate the commissioning process. Such examples, however, are rare.
For further information, please contact Stephen Boddington, Regional Construction Managing Director at JLT Asia on +852 2864 5565