Infrastructure & Cities

Building in change

February 15, 2012

Global

February 15, 2012

Global
Brian Gardner

Managing editor, EMEA

Brian Gardner is a managing editor for The Economist Intelligence Unit's thought leadership division in EMEA. His research has covered a range of business strategy issues focused primarily on energy and sustainability or financial services. Prior work has included consulting and research work concerning energy systems and regulatory frameworks. He holds an MBA from HEC Paris, a master’s degree in urban planning from Columbia University in New York City and a bachelor’s degree in international relations from American University in Washington, DC.

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Project construction in asset-intensive industries

Report Summary

Asset-intensive industries expend substantial resources on their capital projects, but predicting their long-term costs is often a fraught process. A principal reason for this is that construction is regularly beset by delays and cost overruns. As most projects must be commissioned and begin operating before they can provide any return on their investment, issues during construction present major risks for the owners of these assets. Unwanted project change is one of the most common reasons why construction schedules and prices are altered. The overwhelming majority of project owners in asset-intensive industries seek collaborative relationships with their contractors as a way to minimise the negative impacts of changes to construction projects. In addition, collaboration with contractors enables owners to better manage their risks and reduce the incidence of legal disputes. To explore change in construction projects, we conducted a survey of 304 senior executives worldwide in October 2011. The findings of the research, sponsored by Oracle, are as follows.

In the past, the owner/contractor relationship in asset-intensive industries was combative and litigious, but today owners view contractors as partners who can help them minimise the impact of change during project execution. Fully 91% of owners see their relationship with their contractors as “important” or “extremely important” to the process of managing change.

Owners who see contractors as partners after the project has moved into the operations phase are far more likely to view their contractors as essential to managing change. This is a departure from the traditional framework, in which the relationship concludes when construction is completed. Organisations which view the contractor relationship as “extremely important” during the operations phase are far more likely to say it is an “extremely important” aspect of change management – 91% compared with the 50% of respondents who did not rate the importance of the relationship as highly in the operations phase.

Penalties are not the most effective line of defence against unplanned negative changes. While owners will hold contractors accountable if they fail to meet agreed targets, they recognise that a collaborative, open relationship helps them more accurately to predict costs (67%), avoid contract disputes (65%) and deal with change in a proactive way (57%).

Project owners must establish explicit contract expectations, vet contractors and define roles clearly if they are to benefit from these collaborative relationships.  Through these steps and participation in up-front team-building exercises owners are more likely to resolve issues faster, avoid disputes, and reduce the impact of change to their projects.

Unplanned change during major construction projects is seen as inevitable, but owners often lack adequate skills to manage its impact. Barely half 51% of respondents rated themselves as effective at delivering their projects to scope, budget and schedule when confronted with change. Only 43% rated as effective at anticipating potential change. Over one-half of respondents (52%) rank themselves as average or below at managing change. These findings indicate significant room for improvement. 

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