Analysis

McKinsey's four point plan for banishing delays and cost overuns

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31 May 2016
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Project management

McKinsey's Tim McManus a vice president partner in Boston and Mukund Sridhar a partner in the Singapore office provide advice on getting infrastructure projects complete on time and budget.

Infrastructure has a problem. Delays and cost overruns are common. Poor planning and execution, unbalanced contracts, inadequate controls and ineffective risk management are rife. Productivity has been subpar, innovation slow, and margins thin. Simply put, the current approach is not working. 

The industry needs to accelerate innovation, including the use of digital solutions. That may sound obvious, but research has found the construction sector to be a technological laggard, with low levels of digitization and R&D spending. Our research has shown that emerging technologies could boost productivity by 25-30%.

We have identified four ways project owners can improve the odds of success, embedding in each digital tools. Other ideas are quickly emerging, such as advanced analytics for predictive maintenance and geo-location solutions to manage workforce and materials. Non-digital methods, such as modular design and pre-fabricated and preassembled volumetric construction, and even 3D printing are also promising. 

In 2013, McKinsey calculated that $57 trillion of global infrastructure spend would be needed by 2030 just to keep up with economic growth. Learning from successful – and unsuccessful – projects can help companies to improve their outcomes, and the communities they serve. 

Manage the project as part of the overall business case 

Finishing on time and budget is important, but a project can meet those criteria and still not work well. Think of an airport that is obsolete the day it opens. The owner should appoint someone to monitor the business case (not the designer, construction manager, or contractor, who are too close to the project to provide a dispassionate view). The monitor should have the authority to prevent changes during design and construction that could hurt performance. By using advanced analytics on project performance, commodity price trends and contractor performance, owners can do a better job of spotting how projects could fail in time to mitigate problems. 

Match the delivery method to the project 

Particularly in the public sector, there is a tendency to opt for the same delivery method, such as design-bid build or design-build, for all capital projects. The better practice is to decide which method is most appropriate. This means evaluating a variety of factors, such as permitting, land-site control, owner priorities, geotechnical analysis, and organisational and supply chain capacity and degree of risk. Digital tools can improve the efficiency and accuracy of this process, cutting the time needed from months to weeks. For example, advanced surveying and geo-location technologies such as drones improve site assessments and project planning. 

Balance risks 

It is common for owners to try to transfer risks and liabilities. Contractors then seek to cover themselves through higher bids, additional contingencies, costly insurance policies, or adversarial contract management. This can lead to disputes, delays, and failure. Counter-intuitively, when owners, designers, and contractors share the risks, they may actually lower them – and also make the project run more smoothly. 

Technology can play a vital role: next-generation building information modelling, boosted by augmented-reality solutions, can help provide a common platform for owners, designers, engineers and contractors to identify risks and work together to address them. 

Involve operations and maintenance right from the start 

The costs associated with operating and maintaining (O&M) infrastructure assets over 20-30 years are many times higher than those for design and construction. To ensure running costs are considered in design, O&M experts need to be involved early. Many oil and gas companies use this approach for big capital projects, finding that such projects are ready to go upon completion. New technologies can enable a smoother transition from construction to operations. The use of 5D building information modelling provides O&M staff with a more accurate representation of what has been built, meaning less confusion and fewer changes.

Tim McManus (Tim_McManus@McKinsey.com), in Boston, is a vice-president in capital projects & infrastructure. Mukund Sridhar (Mukund.Sridhar@McKinsey.com), a partner in the Singapore office, leads digital & technology research globally for capital projects & infrastructure.

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Comments

The trouble with Tim McManus and Mukund Sridhars' analysis and conclusions, or your reporting of it, is that they are just wrong. "Infrastructure has a problem. Delays and cost overruns are common." There is no evidence to support his, and there is plenty to refute it. Every major infrastructure project since the infamous Channel Tunnel and Jubilee Line Extension have been astonishingly and beautifully delivered ONOB (On Time On Budget) - Heathrow Terminal 5, Channel Tunnel Rail Link (HS1), London Olympics and now, so far, Crossrail. How? Lots of reasons, but in summary, precision project management and high calibre clients. The debate has moved on - infrastructure is seen as high cost, un-smart and high carbon. Solving this needs high calibre clients, but also bold and innovative ones.
Submitted by Terry Hill on 1 Jun 2016.
Is it possible to see some statistical evidence that infrastructure projects do indeed have this problem and that it has been worsening? The last evidence I saw was from the UK and Australia and it showed things had improved, principally out to the increasing involvement of the private sector through PPP's.
Submitted by Neil Smith on 3 Jun 2016.
Although many other risk managers would disagree, the potential for truly sharing risks is much less than people assume. As risks only ever exist in relation to objectives, it requires all the parties to have shared objectives. When a client's typical objective is to receive the benefit from completing the project and the contractor's is to get paid and gain a good reputation the risks they each face are inherently different. While shared incentive models can bring them closer together, too many clients are still surprised when the project gets difficult and it turns out that their contractors aren't quite as invested in the project outcomes as they are. It's dangerous to sell sharing risk as a solution without this caveat. (As an aside, my "risk ears" always prick up when there are so many "mays" and "cans" in one article. It's interesting to read the article replacing them with "might not")
Submitted by Ken Evans on 5 Jun 2016.
The analysis and recommendations in the article are overly simplified and generalised. The case would have been stronger if a project where the writers actually advised and succeeded had been showcased. A common peeve of the concessionaires/ developers has been that their consultants were not effective enough to control delays and cost over-runs. A consultant can be more effective and more rounded in her advice if she actually wears those shoes once in a while and knows where they pinch. Consultants, as critical stakeholders in the Infrastructure industry worldwide have to play a more robust and effective role in banishing delays and cost over-runs.
Submitted by Vidya Basarkod on 8 Jun 2016.

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