How effective are project budgeting and cost estimating in major Australian projects? Thoughts that have recently been brought into question, as budget blowouts on major government projects continue to feature in the media .
And industry professionals know that budget challenges are not limited to major government projects. So, are project budgeting and cost estimating becoming lost arts?
Completing a project on budget is a key measure of project success, and the key to achieving that goal is budget certainty from project inception to completion.
The media features and Grattan reports on the budget challenges of past projects serve as cautionary tales. They also provide us lessons learned and best practices that guide your project towards achieving budget certainty, and project success.
Complete a Business Case
A robust business case is foundational for projects. Business cases provide the initial project budget along with an evaluation of the value of the project against the budget - will this project be worth the money?
While this is a widely accepted principle, the Grattan Institute evaluated 32 projects and found that only 8 had completed business cases prior to committing to the project. Making this the first lesson; take the time to complete a business case.
The second lesson is to include estimates that are realistic. A business case is no place for optimism. Being overly optimistic is an easy trap to fall into when project details are undefined. The influence of stakeholders, project sponsors, consultants, and contractors, also drives optimistic business cases, as a project deemed viable will ultimately move forward.
In an interim report on an audit regarding the performance of major projects, the Victorian Auditor General ‘identified a tendency to underestimate costs and overestimate benefits during projects’ conceptualisation and approval processes, which is an indication of optimism bias.’
A solid and realistic business case starts with your approach. An emphasis on solid historical data and a detailed eye for identifying project risks, coupled with a conscious understanding of stakeholder drivers, are strong foundations for your business case.
Incorporate Continuous Reporting
Once the foundational estimate in the business case has been set, the next challenge to budget certainty is the upward pressure on estimates that occurs as the project progresses, design commences, and detail is progressively added.
Continuous reporting is particularly important while the design develops, and project parameters are established, as the ability to affect change diminishes along the timeline.
Continuous reporting enables you to address potential budget issues quickly and proactively, which helps to maintain certainty.
Budget development plans typically include significant updates to the project budget in accordance with project milestones. This process should be supplemented with more frequent, smaller updates, to evaluate discreet packages of the design as it progresses. This will inform the project team about potential issues in a timeframe where the issues can better be addressed and managed.
Lead with Value Management
Projects with budget challenges no doubt utilise value management at some point during their lifecycle, and for good reason: it has proven to be a successful strategy for cutting costs.
But this is a reactive measure and misses half the point of value management.
Value management was developed as a strategy for building more value into projects, value in the form of improved durability, functionality, or lower life cycle costs, among other benefits.
As a process, value management should ideally be comprised of multiple workshops, held during the early design stages of a project, and should include stakeholders from across the project: the sponsor, end-users, architects, engineers, and key consultants. Working collaboratively, often these workshops result in cost-saving measures - finding ways to meet the same objectives for a reduced cost - being incorporated into the project along with additional value.
Ultimately this results in a project that is more cost-efficient, robust, and resilient to project pitfalls.
And when used in this manner, value management can be a proactive and productive way to ensure not only value, as the name implies, but also budget certainty.