It is well known that the future is uncertain, where uncertainty is an unmeasurable or truly unknown outcome, often unique. This can be clearly seen on large infrastructure projects, which often bring into focus the issues around project selection. A remarkable number of these projects are unsuccessful, by exceeding their time and cost estimates, or inefficient because their returns and/or benefits are well below forecasts.
Major infrastructure projects and other megaproject costs and benefits are many years into the future, and any estimates of them will depend on the assumptions and type of model used. They change their economic environment, generate unintended consequences, and always have the possibility of escalation of commitment driven by earlier decisions.
Ed Merrow did the first published study on major projects costing over US$1 billion (known as megaprojects) for the US military think tank RAND Corporation in 1988, on 52 private sector projects – refineries, oil, transport, and nuclear. It looked at time and cost performance and the factors that drive the outcomes on these projects. Most met performance and schedule goals, but only four came in on budget with an average cost growth of 88%. He concluded “The larger the project, the more important is the accuracy of early estimates.” (1988: 80). This remains the key issue.
Merrow set up Independent Project Analysis to provide project research for heavy industry and the process and extraction industries. Depending on the project, between 2,000 and 5,000 data points are collected over the initiation, development and delivery stages. From this database companies can compare their project with other, similar projects, across a wide range of performance indicators. The data gives estimates on approval, design and documentation, and delivery times for the type of project, and allows for factors like location, access and complexity in costs. When Merrow published his book Industrial Megaprojects in 2011 the IPA database had 318 megaprojects, out of about 11,000 projects in total, from industries like oil and gas, petroleum, minerals and metals, chemicals, and power, LNG and pipelines.
In his 2011 book Merrow recommended a process he called front-end loading, and his best examples of project-definition reduced project timelines and cost by roughly 20 percent. He saw projects having three stages, the first evaluates the business case, the second is scope selection and development, and the third is detailed design. His argument was that there needs to be gates between the stages that prevents less viable projects from getting to authorisation. He emphasises the ‘period prior to sanction of the project.’
Using evidence from the 11,000 projects in his database Merrow argued the best form of project delivery is what he called ‘mixed’: hiring engineering design contractors on a reimbursable contract then construction contractors on a separate fixed price contract. His view was this is the most effective form of project organization, basically traditional construction procurement where consultants are appointed to do the design and a competitive tender is held for one or more contractors to execute the works against a complete design.
Merrow also argues the owner’s job is to select the right project and the contractor’s job is to deliver the project as specified, on time and on budget. In his view contractual relationships are more tactics than strategy, and cannot address any fundamental weaknesses in the client’s management of the project, in particular the client ultimately has to own the design. This crucial point became widely recognised by the private sector clients/owners of large engineering projects that Merrow studied, because they understood that significant risk transfer from clients to contractors is structurally impossible on the projects they undertake.
Design and delivery of major projects can be contracted separately to reduce project costs and risks so that, as far as possible, design and documentation is complete or nearly complete before tendering. The ‘nearly complete’ qualifier is important. A simple project can be fully specified just because it is simple. However, there is a limit to how much design can be completed in the initial stages of a major project, because the specification of a major project develop over time as the project details are refined and defined. Therefore, it is unreasonable to expect a major project to be fully specified at tender, and in most cases this would not be possible. On the other hand, it is not unreasonable for tenderers to expect the documentation they receive to be sufficient, because the extent and clarity of the design determines their project time and cost plans.
There are a number of advantages of this strategy of unbundling design and construction, particularly for major projects. Breaking a project into smaller, sequential contracts spreads the cost out over time, and does not incur interest costs if a loan is not used for design work. It makes quality control easier and more effective, by being focused on each stage, which is an important risk management tool. Separating the design stage from tendering and construction will also improve opportunities for consultation with the community and stakeholders. Most importantly, completion of design and documentation before tendering reduces contractor risk and therefore total project cost.
This argument is for design and construction of projects to be contracted separately, because this will reduce project costs and risks. As far as possible, design and documentation should be complete or nearly complete before tendering or starting the works. The key factor is therefore the extent of the specifications, on some projects there may be a limit to how much design should or could be completed upfront. For many major projects these develop over time as the project details are refined and defined. It is unreasonable to expect a complex project to be fully specified at tender, and in most cases this would not be possible. It may also be advantageous to look for innovative ideas or design options, so for these projects an incremental approach would allow contractors and suppliers the opportunity for input during the development of the design. This also has the advantage of reducing uncertainty from poor tender documentation, thus lowering risk and cost for tenderers.
To deliver better results in on-time and on-budget delivery, Merrow argues project developers or sponsors should spend 3 to 5 percent of the cost of the project on early-stage engineering and design. This is because the design process will often raise challenges that can to be resolved before construction starts, saving time and money.
If more realistic, and therefore more accurate, time and cost estimates were given for major infrastructure projects before they are approved, and during the design and development stages, there would be fewer recriminations about project performance and less incentive to find scapegoats on completion, which is typically over budget and schedule. There would be fewer of the common accusations of poor productivity, management failures or poor planning, thus lessening the atmosphere of acrimony that often surrounds major projects in their later stages
Merrow, E.W. 1988. Understanding the Outcomes of Megaprojects, RAND Corporation, Santa Monica.
Merrow. E.W. 2011. Industrial Megaprojects: Concepts, Strategies and Practices for Success, Wiley, Hoboken, NJ. Second edition 2024.
