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Background – Owners, contractors, designers, and stakeholders have focused on improving project management processes and project controls, but there are still many areas for improvement
Target Audience – Owners with major construction programs but applicable to all stakeholders involved with construction projects
Key benefits
Example pitfalls of inadequate project management processes and controls
Outlines leading industry practices
Example approach for assessing project management processes and procedures and project delivery processes
Identifies the link between project control gaps and project management
Monitoring Capital Projects and What to Do if One is in Trouble
Investing In Tools and Infrastructure
From concept to project:From concept to project: Critical considerations for project developmentClay Gilge
Principal, Major Projects Advisory
KPMG LLP (U.S.)
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From concept to project: Critical considerations for project development
Project development cycle
Appraisal Development Execution Operation
Organizations with an extensive track record often experience the repercussions of unmet expectations, delayed ribbon cuttings, and bloated expenditures.
The ability to influence project success or enhance value is the greatest in the development stages and declines as the project advances towards implementation.
Knowledge check #1
Ranking projects based on key factors is typically part of the project identification process?
From concept to project: Critical considerations for project development
Key Outcomes of this stage
Preparation of detailed designs and specifications
Appraisal Development Execution Operation
Realistic estimation of costs, schedule, and operational requirements
Identification of risk and uncertainty, and exploration of mitigation measures
Identification of human and other resources for the project
Preparation and refinement of project execution plans, work breakdown structures, organizational charts, roles and responsibilities, tailored project procedures, budgets, and funding documents
From concept to project: Critical considerations for project development (continued)
Feasibility Reviews
Insufficient feasibility studies are often identified as a contributing factor in project failures.
Feasibility reviews can be used to evaluate various technical, operational, environmental, and other performance aspects of the project.
Project Team Development
Projects must be executed by a project team capable of meeting the unique needs of the project including technical complexities, resource challenges, and stakeholder assumptions and constraints.
Funding
Capital projects are typically funded from the corporate balance sheet or through equity investment in a special purpose entity, or single project financing.
Financing arrangements differ sharply by the type of owner and the type of j t t ti
Lenders may require insurance policies to cover specific project risks (injury to persons or property, professional errors and omissions, automobile liability, etc.).
Organizations may also secure business interruption insurance to cover other risks.
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Knowledge check #2
Which activities are common elements of the development phase of the project life cycle?
A Preparation of specifications
B Development of cost and schedule estimates
C Identification of risks and risk mitigation measures
From concept to project: Critical considerations for project development
Incentive Programs
Construction material sales tax relief
Special utility rates
Government or private grants
Research and development tax incentives
Federal tax incentives including energy efficiency programs
Direct subsidized loans from state and local governments to private businesses for the purpose of job creation
Site advantages – government entities may provide private sector organizations with free land, buildings, exemptions from local and state regulations, and other customized services to
land, buildings, exemptions from local and state regulations, and other customized services to develop in a specific area, zone, or site
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From concept to project: Critical considerations for project development (continued)
Delivery and procurement strategy
Selecting the most appropriate project delivery strategy and contracting strategy requires deliberate planning and careful consideration of the market environment.
The spectrum of project delivery strategies ranges from those where the owners are fully The spectrum of project delivery strategies ranges from those where the owners are fully involved to where their involvement is minimal.
The project owner’s objectives and organizational characteristics dictate the available project delivery strategies, and the most appropriate delivery strategy will also depend on the specific project and circumstances.
Contracting strategy includes decisions about how to:
– Execute the work
Segregate the project’s scope into various work packages
– Segregate the project’s scope into various work packages
– Obtain financial guarantees from vendors
– Allocate risks and rewards in contracts among the various project participants.
Budgeting, estimating, and contingency managementClay Gilge
Principal, Major Projects Advisory
KPMG LLP (U.S.)
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Budgeting, estimating, and contingency management
A comprehensive project budget with a reasonable contingency is critical for a project to be considered a success.
Depending upon the accuracy of project estimating techniques employed, the development of the overall project budget may or may not include a reasonable contingency amount.
– If an estimate is too low, the project contingency will most likely be insufficient, leading to budget overruns.
– An overly conservative estimate can tie up valuable capital that could be used for other capital projects, and the project may be deferred or rejected by senior management.
Budgeting, estimating, and contingency management (continued)
How do I prepare an accurate project estimate during planning and development?
Establish the degree of accuracy based on the phase of the project.
Utilize the appropriate estimating technique for the phase or project stage (At the initial feasibility or conceptual stage parametric order of magnitude unit price or otherfeasibility or conceptual stage, parametric, order-of-magnitude, unit price, or other estimating methods).
Prior to bidding, a detailed estimate based on actual quantity take-offs and current market pricing for labor, equipment, materials, and subcontractor services should be prepared.
Any significant variation between the values for individual line items should be investigated.
Consider obtaining a third-party cost estimate to validate the construction bids.
Budgeting, estimating, and contingency management (continued)
How should historical construction costs be used to develop an estimate for a project?
Construction cost estimates typically utilize use historical cost data.
Supplemental information specific to the project maintained by the owner may be combined with this cost data such as:with this cost data, such as:
– Actual construction project cost information from other completed or ongoing projects
– Published cost estimating manuals
– Construction cost indexes
– Manufacturers catalog information including price information
The owner should confirm that project-specific variables have been accounted for in the cost estimate, including cost indices adjusting for location and inflation, as well as regulatory and
estimate, including cost indices adjusting for location and inflation, as well as regulatory and other location factors such as more restrictive building codes.
Budgeting, estimating, and contingency management (continued)
What is the benefit of getting third-party validation of project costs during budgeting?
Minimize the risk of exceeding the budget by validating the projected costs.
This validation can utilize additional information that may not be available in cost indexes such as data collected from other construction projectssuch as data collected from other construction projects.
This information can be used for an individual construction project, or, if an owner is embarking on a larger capital program, it may be useful to incorporate this information into an updatable database.
The owner is responsible for developing the budget for costs that are not included in the construction contract prepared by the construction manager or contractor.
Any proposed value engineering substitutions should be reviewed by the owner and the design team to determine the impact to both construction costs as well as operational costs.
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Budgeting, estimating, and contingency management (continued)
How should contingency be established?
Most projects include a contingency fund to cover both anticipated costs—due to the project’s phase—and unexpected costs.
Project contingency is an amount included in the construction budget to cover unknown Project contingency is an amount included in the construction budget to cover unknown conditions, allowance for design growth, errors in the contract drawings, inaccurate pricing, price escalation, and minor changes within the project scope.
The optimal amount of project contingency permits the owner to adequately address project risks while not restricting the use of capital funds that can be assigned to other projects.
Developing the contingency fund is not a “one-size-fits-all” approach.
A risk assessment can confirm that the contingency budget is appropriate to cover the costs of all probable risks, as well as including contingency for unknown risks.
When developing a detailed project budget it is not important to worry about financing costs, insurance or taxes as they are always accounted for as operational expenses.
How do I manage and track contingency once established?
Contingency is critical to the success of a project and should be monitored on a continuous basis.
Contingency should not be used to fund significant changes to the scope of the project Contingency should not be used to fund significant changes to the scope of the project.
The project management team should review the contingency fund balance along with project risks throughout the duration of the project to determine if adjustments to the fund are needed.
Budgeting, estimating, and contingency management (continued)
What controls should be in place to avoid budget overruns?
The project management team should review the contingency fund balance along with current project risk register/risk dashboard on a continuous basis throughout the duration of the project to determine project budget variances.
Tools that facilitate budget monitoring include project earned value and a cost to complete analysis.
The risk register should be updated to reflect the progress of the project as well as any additional risks or opportunities identified.
All changes to the contingency forecast should be communicated to all relevant parties by means of a formalized communication process.
