NAO Report – Survival kit for major project relationships
Byon July 23, 2018
When the NAO produces an analysis of key aspects of major project relationships, it is always worth taking note. The NAO report titled ‘Survival Guide to Challenging Costs in Major Projects’ is no exception.
The UK government is working on some of the biggest and most complex infrastructure projects it has ever undertaken, not only in cost but also in time from inception to delivery. This will, by definition, increase the complexity of the contractor/supplier relationship itself. Combine these two key elements with a demand for innovation, the ongoing requirement for greater certainty in project costs, and maintaining alignment to the project objectives once a project has achieved a certain amount of momentum, and you have a very challenging environment.
The NAO’s survival guide very much reflects a number of aspects of our own experience when we see clients dealing with complex major project relationships with their suppliers. This report looks to identify some of the warning signs of potential issues and ways in which to mitigate some of these key risks.
It should be remembered that these warning signs (we have paraphrased) are a prompt to ensure that your project teams are asking the ‘right’ questions, and that you have the assurance they are already on top of doing their research and their critical thinking around the project.
Warning Signs at Project Initiation Stage in Major Project Relationships
• A minister or sponsor suggests a groundbreaking project
It is common knowledge that it is always riskier to do something new, as there will be neither historical evidence of success nor a playbook for the bumps in that particular road. Innovation stretches boundaries and it can open up different thinking for more economical or successful ways of achieving the business outcomes we need. But, it’s important to make sure your project is ‘groundbreaking’, not ‘back-breaking’. Be careful to be (very) clear about what outcomes you are aiming to achieve and the process by which you will achieve them.
• A project offers soft benefits that will take decades to deliver
What will you have to show for the money you spend on a project? If the answer is fuzzy and is a challenge to clearly articulate, then think again about the viability of the venture. Spending, especially in this day and age, requires a clear, quantifiable return within a specified time frame.
• Your team gives you a point estimate
The costs of a project become clearer the longer you are working on it as the practicalities of relationship and resources, capabilities and capacities are all established over time. Therefore, initial project estimates should always be shown in a format suited to the lack of clarity and certainty there is at that point in the project. In this respect, the guide suggested they should be shown as a ‘range’. The NAO also suggests that you should beware of stakeholders who bring you fixed costs when you know they cannot be that certain. From our own perspective, evidence from other successful complex major project relationships tells us that a well-structured and well-informed early market engagement exercise with potential suppliers will help to reduce those uncertainties. It will provide you with better cost estimates based on the outcomes and assumptions you are providing to the market.
• Your sponsors have vested interests
Who benefits and how? The NAO states that underestimating project costs is one of the most common reasons for friction and failure on major projects. As far as you can, be vigilant to make sure that there are no unannounced reasons for parties to be pushing for a project’s approval. Underestimation could cause all manner of risk factors to spike in a project.
• Alternatives are ruled out too early
It is, of course, correct to discount certain alternatives once you have established good reason for them to be set aside. However, the NAO has identified that there can be occasions when objective analysis isn’t always being conducted and, therefore, you could be sacrificing the right solution for the wrong reasons.
Warning Signs after Initial Decision to Proceed with a Complex Project Relationship
• Your commercial team says “don’t worry, the contractor bears all the risk”
While there will be suppliers who will offer, or agree to take on, some or all of the risk(s) on a project, it must be remembered that no matter the agreement, the government is likely to be left to pick up the pieces if the supplier has borne too much financial risk and goes out of business as a result. The risk of suppliers walking away or going the way of Carillion (and others) must be factored into risk decisions. Again, our own experience of both balancing risk and gaining appropriate commercial assurance not just at the inception, but through the life of the project relationship, determines how the approach to these risks needs to be articulated and evidenced.
• Your delivery team asks you to release funds early
The NAO raises another good point here. They advocate spotting the signs of parties under financial pressure. While not always an indicator, in particular if early funds release was a pre-condition/agreement of an early payment rebate, and funds are requested early before a key milestone is complete, this should be a flag on the radar of your commercial team. Once again, this does not necessarily mean it’s a red financial flag, it just means further questioning and investigation should be undertaken.
• You’re told that cost overruns can be solved by delaying projects
While this may be a legitimate strategy in some circumstances, a requirement to delay projects is likely to be a wider symptom of a more fundamental business challenge, which necessitates a more detailed analysis. Overruns can be costly, as can delays, so you need to have greater certainty of the cause of the underlying issue(s) before authorising any delays to projects.
• You’re told not to worry about rising costs as the benefits are also increasing
It may be the case, but, as your instincts will have already been triggered, always expect clear evidence of additional benefits to be provided. Calculate cost overrun impacts on the viability of the project. At what point does the project become unviable? And what has changed (and what can you evidence) that has improved the benefits from the project?
Ways to get Better Certainty and Mitigate the Risks
The NAO makes it clear that many complex projects and the corresponding supplier/contractor relationships are not adequately costed or have a good enough insight into what the costs and timescales are likely to be at the outset. However, our own experience across hundreds of these more complex relationships often evidences that by ensuring your expectations are better articulated at the beginning and having early market testing with suppliers to test both your cost and benefits assumptions before you go too far down the procurement route, your costs, risks and benefits/ROI can be better identified and understood.
Evidence from the most successful major project relationships identifies seven common steps prior to embarking on a formal procurement process to provide you with better insights into the viability of a project:
Step 1: Socialise the organisation vision
Involve as many relevant people as possible to identify all key aspects of the business case you are developing for the project.
Step 2: Clarify the solution expectations
Commit the business case to a written document to be interrogated and understood by all stakeholders as clear and unambiguous.
Step 3: Client/supplier behaviours
Both client and supplier side requirements, expectations and (most importantly) the behaviours you expect between you must be clearly articulated, understood and acted on for the project have the right foundations.
Step 4: Clarity of requirements
Ensure that all project/solution requirements are clearly articulated and aligned with the route to the business outcomes expected from the project.
Step 5: Key contractual principles
The most successful relationships have flexible contractual foundations that work for both supplier/contractor and the client so that business outcomes are achieved at the earliest opportunity, within budget and timeframes. The previous four elements should be reverse engineered into key contractual principles so that the principles of the contract (a) all align to the business outcomes to be achieved and (b) drive ‘enabling’ behaviours between both supplier/contractor and the client, rather than just focusing on penalising the supplier/contractor when something goes wrong.
Step 6: Supplier assessment scoring criteria
To find the right supplier with a fit-for-purpose solution, it’s important to develop and explain an objectively weighted scoring mechanism based on all the criteria you feel is relevant to your decision. Building in a scoring mechanism that helps you to assess how you are likely to obtain the ‘right behaviours’ from the supplier is one of the most key aspects.
Step 7: Early market testing
No matter the detail you go into with your business case and other pre-procurement documentation, it makes sense to go out to the market early and ask suppliers their thoughts on your assumptions and expectations, outcomes and objectives. This will help to inform how close or how far your initial assumptions are in achieving the business outcomes at an appropriate investment level and time scale.
The NAO makes a number of very salient points in its report. A number of its key concerns seems to be the over-optimism on costings and timings, a lack of quality performance updates, a tendency to wait until costs overrun before reviewing the value benefits of a project once it gets going, and a lack of consistency and transparency. These are all causes for concern on a project. And, with public scrutiny of government/public sector projects at an all-time high, it’s all the more important for major projects and their relationships to be run, and be seen to run, as efficiently and effectively as possible.
The NAO report is a good set of insights to help inform anyone involved on a major project of the warning signs which could indicate that project costs, benefits and time scales are entering a challenging period. Hopefully, in addition, our seven pre-procurement steps from organisations that run successful complex and major project relationships to mitigating these risks will be of some help to you.