Project Management: The Scottish Job - Essay Example

Project Management - The Scottish Job The new Scottish parliament building was finally completed in 2003 after a delay of nearly two years and a cost overrun of 122 percent (ENR). The building was planned by the British government before the Scottish parliament was created and the process of construction began in 1998. When the construction work began the cost was estimated at 50 Million (SPCB, 2001) and the building was to be completed by 2001. The actual construction started in mid 1999. The initial cost estimate was revised a number of times due primarily to cost escalations, delay in execution and change in project specifications. As early as May 1999, even before the actual construction had begun the cost estimates had been revised with additional money required for Site acquisition, demolition and archaeology; Fees, VAT and contingencies; and fit-out, loose furniture, IT, etc, and a figure of 90m for the projected costs of the project was produced. This was immediately revised to 109m as being the estimated cost of the project, including construction cost of 62m (SPCB 1999). The main reasons cited for cost increase were: a) increase in floor area to accommodate additional staff and offices; b) an increase in the amount of circulation space required; and c) changes to the specification for a formal entrance. The time for completion, including all internal fit-outs, was projected as the autumn of 2001. The project was finally completed in 2004 at a cost of 375.8m! There had been major changes to the project specification since the first cost estimate was produced for the project. These included an increase, between December 1997 and February 2000, of 11,240m2 (a 56% increase) in the total gross area (from 20,070m2 to 31,310m2). If one excludes the additional car parking provision, there was, over the same period, an increase of 13,109m2 (an 80% increase) in the gross area (from 16,470m2 to 29,579m2) (all numbers from Spice Briefing, ibid). In relation to the costs, the letter of 10 June 2003 reported a further increase of 37.7m in the overall target figure for the project. This increase meant that the total budget for the Holyrood Building Project (including landscaping costs) stood at 375.8m. It added that the aim was to have a "clear and robust position on cost, fees and programme before the start of the summer recess" (Reid 2003, p 2). In relation to the completion date, the letter of 10 June 2003 stated that the target completion date was still November 2003 but that more detailed information was being sought on this matter. The Auditor General of Scotland, Mr. Black, investigated the reasons for the gross cost overrun and delay in execution of the project. His report looked at questions of cost, how resources had been used and managed, and the overall conduct of procurement. Construction projects often run into problems and fail to meet the desired objective. The objective, in the eyes of the client, can be summarized by stating that it is 'value for money' which implies that, even if the building is not the cheapest, the entire combination of whole-life costs and quality costs is optimal. Uncertainty is an essential element of all projects especially those related to construction. These can be categorised under four broad categories: 1. The scope of the work may change, 2. The quality specifications of the work to be done can change, 3. The costs might escalate, and 4. The time scheduled for completion may not be correct Increased integration between financial and real sectors of the economy, and major capital commitments in the building, means that the poor quality of risk management in construction has perhaps a greater significance at present than at any other time since the 1970s (Flanagan & Norman, 1993). In this report we address the problem of the cost and time over-run that resulted from a faulty procurement system adopted in the construction planning and execution process for the new parliamentary building in Holyrood; in light of the report of the Auditor General of Scotland. Discussion: Construction procurement is defined as the "amalgam of activities undertaken by the client to obtain a building (Franks, 1984). Another definition, given by Love et al (1998), defines a procurement system as "an organizational system that assigns specific responsibilities and authorities to people and organizations, and defines the relationships of the various elements in the construction of a project." The risks that the objective will not be achieved are high in a construction project and need proper planning and monitoring to minimize the chances of these impacting the project. So what is Risk The Oxford English Dictionary defines risk as "a chance or possibility of danger, loss, injury etc." We can understand risks as the lack of predictability about the outcome or consequences in decision or planning situations or the chance that something unforeseen happening that will impact the attainment of objective. Risk can be characterized by three factors; a) the possible occurrence of an event that may affect the achievement of the objective; b) the likelihood of the event occurring; and c) the impact of the event in terms of financial or social costs. It is essential to have a proper risk management and procurement system (Flanagan and Norman, 1993; Ross et al, 1996). We can understand risk management and the linkage between risk and procurement systems through a brief overview of the risk management framework suggested by Flanagan and Norman (1993). There is need that the risks are understood at the planning stage itself and management decision making must attempt to ensure that the project objectives are achieved despite the risks identified. The first stage, therefore, of the planning for mitigation of risks is the development of an identification and understanding of the potential risks that a project faces. Risks can be broadly classified as controllable and uncontrollable (Flanagan & Norman, 1993). Controllable risks are those risks which a decision maker undertakes voluntarily and whose outcome is, in part, within our direct control; and uncontrollable risks as those risks which we cannot influence. Once the risk is identified an assessment of the risk both qualitative and quantitative has to be made. Once the risks have been identified and assessed, they need to be classified so that focus may be placed on areas that are within control. Risks can be broadly classified as external and internal risks. Internal risks are those risks within the procurer's organisation; and external risks are those factors that are a result of the environment in which the organisation has to operate, and are outside the direct control of the firm (Chicken, 1996). After identification and classification, the risks need to be analysed and quantified. Various measurement techniques can be utilized to evaluate the risks and the range of possible effects. These techniques include mathematical approaches such as decision trees, expected monetary value, simulation or intuitive approaches such as expert judgement. The latter approach is dangerous (Flanagan and Norman, 1993). It is important to use formal methods in risk analysis and decision making (ibid). Through risk analysis the decision maker can analyse the various risks which may adversely affect the project and make an informed decision on how to respond to these risks. Attitude can be viewed as a way of thinking. In terms of risk attitude, there is a suggestion that people/organisations can be grouped into three categories - risk loving, risk averse and risk neutral (Flanagan and Norman, 1993). Every project has a certain degree of risk hence the decision-maker should try and remain risk neutral in order to maximize the opportunities and minimize the threats presented. If the risk cannot be prevented or avoided the basic principle underlying strategy must rely on the simple principle that the risk should be borne by the party best able to manage it (HM Treasury, 1995). Risk response is the strategies used for responding to risk. Flanagan and Norman (1993); Lowe and Whitworth (1996) argue that the response to or allocation of risk can be through: 1. Risk reduction; 2. Risk avoidance; 3. Risk transfer; and 4. Risk retention Selection of appropriate procurement systems is one of the techniques for risk response. However, the procurement route, that is appropriate to the overall balance of objectives, and to client priorities, for each project should arise from those objectives and priorities (Turner, 1990). Several different types of procurement systems have evolved over the years from the traditional procurement model with the aim of facilitating the achievement of the project objectives. Studies have shown that these systems have different characteristics and are suitable to varying situations (Turner, 1990). These procurement systems can be viewed as an important tool for risk management in the area of risk response development. Risk management seeks to ensure that all goes according to plan and the project objectives are achieved. Several different types of procurement systems have evolved over the years from the traditional procurement model with the aim of facilitating the achievement of the project objectives. Studies have shown that these systems have different characteristics and are suitable to varying situations (Turner, 1990). These procurement systems can be viewed as an important tool for risk management in the area of risk response development. A proper understanding of the relationship between risk management and the choice of procurement systems is evidently of crucial value to the achievement of the project objectives. Strategy for risk reduction or risk transfer must lie in looking for ways to reduce cost and time of procurement; improving project, contract and asset management; using competitive procurement; and risk allocation. Lowe and Whitworth (1996) argue that the allocation of risk is central to contract and procurement strategy. The amount of risk that each party will bear is largely attributed to the procurement strategy. Depending upon the procurement system adopted the risk can be allocated between the client and the contractor. The different procurement systems and the division of risk can be tabulated as under (CUP, 1993): Procurement System Allocation of Risk Client Contractor Design and build 10 90 Develop and build 25 75 Traditional pre-planned (lump sum fixed price) 50 50 Traditional pre-planned (re-measured bills of quantities) 70 30 Management contracting 80 20 Construction management 90 10 At one end of the spectrum is the design and build system where most of the risk is borne by the contractor whereas on the other end of the spectrum, in construction management most of the risk will be borne by the client. In the traditional lump sum fixed price system, the risk is evenly split between the contractor and the client. King (1996) shows that a design-build guaranteed maximum price arrangement may not only meet the employer's cost concerns but his programme and quality worries as well. Also, projects executed under these systems get completed in much shorter times (ibid). HM Treasury has produced guidance on 'contracts and contract management for construction works' through the Central Unit of Purchasing (CUP). This guidance describes the different contracting or project management strategies and different types of contract. It states that all such strategies represent a balance between cost, time and control. A contracting strategy is primarily concerned with how design aspects are related to construction, including: (a) who bears the design risk and controls the detail of the design; and (b) the completeness of the design prior to the commencement of construction. The contract type, as opposed to strategy, is concerned with the allocation of risk within the contract and the method of calculating payment. The contract strategy and type need to be considered together. In the case of the new Scottish Parliamentary building the report of the Scottish Auditor General Black have all reported that the delay and the cost overrun of the project happened due to the faulty selection of the procurement system. Various procurement/ contract strategies may be used in relation to the design and construction of a building such as the new Scottish Parliament building. The strategy adopted for the Holyrood Building Project is based on a Construction Management approach. This implied that the government wanted to have a 'hands on' control over all activities involved in the execution of the project. When it was decided to construct the building and Holyrood was chosen as the site in January 1998 the government had precious little idea of what they wanted. In July 1998 the architectural practice led by Enric Miralles, in partnership with Edinburgh based RMJM, was chosen to design the new building. Yet estimates of the projected cost had already been released! All subsequent reports and media reference this estimate. The design and subsequent modifications to the requirements based on changing definitions for the use of the building made a huge impact on the initial estimates. The actual requirement was frozen only in mid 2000 or very near the first projected time of completion - which had been delayed as a consequence. Yet cost estimates rose as design continued. Design development became a process of costing a developing design rather than developing the design within a cost. In addition the earlier estimates did not include the cost of 'loose furnishing' and a host of other essentials required to have a complete and inhabitable building. In 1999, the parliament hired Bovis Lend Lease (Scotland) Ltd. as construction manager. That was a mistake, claims Black. Construction management is unsuited for most building projects in the public sector, he maintains, for the approach leaves the owner with almost all of the risk. The largest impact on the escalated cost of the building however, came from the fact that the project was delayed by twenty months. As was reported by the Holyrood Progress Group in January 2003, 'the inflationary pressures on this project are considerable' (quoted in Spice Briefing, 2004). The budget of 195m included a construction cost of 108m which was based on 1998 prices. It did not account for the fact that there would be inflation to contend with. The construction industry inflation usually runs at a level higher than the general rate of inflation. It is measured using a set of recognised indices called the Building Cost Information Service (BCIS) indices. These indices are based on nation-wide prices and consideration has to be given to the fact that there are certain areas where inflation runs much higher, referred to as 'hotspots'. Edinburgh is and was one such area. "Technically inflation is outside the control of the project. As the estimation of inflation is a retrospective science and its full impact cannot be assessed until completion, it is impossible to tell what the final position on this will be. The indices do give us a rough guesstimate and the degree of certainty grows with every passing quarter and as more contracts are let" (SPCB 2001, paras 11-12). We can only conclude that the basic reason for the escalation of cost that resulted essentially from the delay in execution (if we omit the cost hike due to changes in design) was due to the improper choice of procurement strategy. If the risk had been transferred to Bovis through the adoption of a system 'design and build' or 'develop and build' the contractor would have been under pressure to execute the project on time to avoid escalations that would otherwise have to borne by them. Indeed, as experience has shown (cited earlier) such projects do get constructed in much shorter times than those addressed through the construction management strategy. The management of the project reveals a consciousness of the risks involved and the different procurement systems available on the part of the decision makers. Therefore, this project faced the risks inherent in not allocating them to the party best equipped to deal with them and work towards entirely or partly preventing them from occurring. All things considered, the question that one may ask is whether such prestigious buildings as the Parliament House of a State can be left entirely to a contractor to design or develop References CUP (1993) HM Treasury: Central Unit on Procurement; Guidance Note No 41 Managing Risks and Contingency for Works Projects, HMSO, London. Chicken, J. C. (1996): Risk Handbook. International Thomson Business Press, London ENR (2004): Inappropriate Management Cited on Costly Scottish Job. Engineering News-Record, 7/19/2004, Vol. 253, Issue 3 Flanagan, R. and Norman, G. (1993): Risk Management and Construction, Blackwell Scientific Publications, London. Franks, J. (1984) Building Procurement Systems - a Guide to Building Project Management. The Chartered Institute of Building, Ascot King, V. (1996) 'Constructing the Team': A US Perspective. International Symposium for the Organization and Management of Construction: Shaping Theory and Practice, Glasgow, Scotland, pp 414-423 Love, P. E. D., Skitmore, M. and Earl, G. (1998): Selecting a suitable procurement method for a building project, Construction Mgmt and Econ, Vol. 16, 221-233. Lowe, J. and Whitworth, T. (1996): Risk management and major construction projects, International Symposium for the Organization and Management of Construction: Shaping Theory and Practice, Glasgow, Scotland, pp. 891-899. Reid, S. (2003) Letter to the convener of the Finance Committee dated 10 June 2003. Text of letter published in Parliamentary News Release of 10 June 2003, 'Parliament Secures Consultants' Agreement to Cap Holyrood Project Fees'. Available at: http://www.scottish.parliament.uk/news/news-03/pa03-041.htm Ross, S. A., Westerfield, R. W., Jordan, B. D. and Firer, C. (1996): Fundamentals of Corporate Finance, Irwin Publishing, London. SPCB (1999): Scottish Parliament Building - Summary of Progress. Available at: http://www.scottish.parliament.uk/holyrood/sumprog-00.htm SPCB (2001): Holyrood Project - June 2001: Sixth Progress Report to Parliament. Available at: http://www.scottish.parliament.uk/holyrood/junrep-01.htm Spice Briefing (2003): THE HOLYROOD BUILDING PROJECT, available at: http://www.scottish.parliament.uk/business/research/briefings-03/sb03-52.pdf Turner, A. (1990) Building Procurement, Macmillan, London. Read More