Avoiding Project Runaways, Overruns and Failures: A Primer for Management

By Larry Baye, CMC, CISA and Mark Bednarz, CPA, CISA, CFE

Whether your organization is a governmental entity, commercial business, professional or business service firm, not-for-profit or higher education institution, the odds are great that you have either experienced a project that ran amok or are aware of the frustrations and stresses of others who have lived through one. The problem may relate to the failure to launch a new product or service, substantial delays in rolling out a new (or upgraded) information system or a new communications network, cost overruns in the construction of a new facility or the inability to seamlessly merge and integrate into a new business.

With all that has been written about project management in recent years, it is surprising to find that projects continue to falter; thankfully, most never “crash and burn” in a visibly public manner or result in litigation. In this e-newsletter, we will offer some guidance for management consideration in project oversight.

Project Failures and Near Failures

Our readers may be able to identify with the circumstances in the following examples in terms of their own organization’s project failures or “almost” failures and the questions resulting from them:

• A government entity incurred a 20% cost overrun in the renovation and expansion of their community facilities. In reality, the additional cost was substantially higher if you factor in all of the project components that were removed from the original scope once the bid and change orders exceeded the original estimates. Were these incremental costs: 

– a byproduct of poor design that was not based on a site survey,
– the imposition of a compressed development or construction timeline that could only be achieved under ideal conditions, or
– the result of a lack of clarity in terms of project leadership and control?

• A financial services firm opened their first overseas office with locally hired resources but without any corporate “feet on the ground” to oversee the operation and instill the culture and practices used at established locations. After fines were imposed for failing to comply with local laws, the decision was made to shut down the office just a few years after startup. Would: 

– an onsite presence, coupled with more in-depth due diligence to better understand what it takes to “do business” in the country, have resulted in a positive outcome? 

• A museum purchased a commercial off-the-shelf information system to support their collections management, membership, fundraising, ticketing and revenue-generating ancillary businesses, including gift shops and catalog sales. The contract with the vendor called for the immediate acquisition of new hardware to serve as the platform for software development, testing and user training. Years of effort spent customizing the system not only doubled the price of the project but undermined the functionality, integrity and vendor warranty of the package. Couldn’t management have: 

– anticipated the impact of heavy customization and realize that by investing in the equipment upfront, it could become a “sunk cost” if the project failed?

• A medical device company ramped-up its sales force to promote its first commercial product to hospitals and physicians across the country. The campaign gained little traction once it became clear that the doctors would have to pay the full cost of the devices if the insurance carrier denied reimbursement. Had: 

– an economic feasibility and market analysis study been performed, could these issues been detected before launching a costly national campaign that depleted the company’s reserves?

• A state agency acquired new technology to transform the way it issues and manages professional licenses and permits for hunting, fishing as well as various events. These activities were revenue-generators for the state. The system crashed and burned. Were hard questions asked about: 

– the scalability of the technology, and
– its ability to handle the seasonal workload?

Positioning for Success

Projects should have a clearly defined lifecycle, where each phase consists of a number of steps designed to put the project on solid footing, while providing management with the understanding and judgment to make informed “Go/No Go” decisions along with midcourse corrections. We classify the phases as follows:

Conceptualization and Planning

• Ideation to generate ideas/solutions that may entail 

– research,
– setting project vision and objectives, as well as
– conceptual design.

• Feasibility, including 

– market/demand study,
– economics,
– usage,
– payback (e.g., cost-savings, revenue potential),
– various developmental and operational scenarios (e.g., build/deploy in stages versus combined into a single project for economies of scale),
– underlying assumptions,
– technical, labor, regulatory and environmental conditions, etc.

• Business Case with 

– liable estimates, plans and timetable with critical path (e.g., in a private-public partnership, how and when will the funds be raised as well as bond issuance and/or loans),
– business drivers (e.g., system modernization/replacement or site improvement, safety, facility addition or rehab),
– funding/financing options (e.g., timing, cash flow availability, loans or grants, private donations),
– alternative implementation approaches,
– project suitability criteria (e.g., has the entity successfully completed a similar project),
– contracting strategy (e.g., use of state contracts or preferred pricing),
– acceptable contingency budget,
– defined milestone and performance expectations,
– governance structure (e.g., approvals, decision making, oversight),
– identified risks by phase and how they will be mitigated.

• Go/No Go Recommendation and Decision, including 

– options to defer/postpone, abandon or delay the decision/start if the window for development or construction is rushed to the point that any slippage would jeopardize a successful outcome,
– funds still have to be raised,
– necessary information regarding the product, site, facility or equipment is unavailable,
– the critical path is dependent on a single provider and no substitutes exist, etc.

Execution

• Funds Availability (e.g., when will the money be available over the project life, when does the organization expect to need it, and how will the funds be invested during this period)

• Oversight/Monitoring

• Detailed Design and Engineering (e.g., by phase, what is required, what prior work/drawings can be leveraged, who will handle specific functions)

• Procurement Strategy (e.g., RFP issuance, product/service proposal/bid evaluation and selection, scope/cost alignment) 

– for system projects: phasing
– for construction: design, value engineering, defined performance metrics, vendor bond and liability coverage, contract negotiation (e.g., one versus multiple agreements)
– for systems: license, development and maintenance support

• Construction/Development and Quality Assurance (e.g., meets design and milestone/performance standards, punch list items)

• Change Control (e.g., scope changes versus scope creep, timing, scope, funding impact)

• Contract Administration (e.g., invoice approvals, retainage, subcontractor payments)

• Project Closeout (e.g., testing acceptance, pre-final payment, assemble/retain project documentation, warranty coverage, potential claims and post-implementation review to determine if the originally envisioned goals are achieved, met the requirements and what are the takeaways which can be applied to the next project)

Operation

• Transition and Run (e.g., facility opening, program activities)

• Facility Maintenance (e.g., warranty for repairs)

• Beneficial Use (e.g., revenue generation or cost-saving forecast, promotion/ad campaign, revenue sharing, contracting with outside entity and managing facility usage)

Key Questions for Management

In our view, there are fundamental questions management should ask to give the project the best chance of success. We have provided some examples below to guide in assessing the project status and viability; note that some questions may pertain to a specific phase of a project, while others should be considered throughout its lifecycle.

Will the project provide meaningful value? Can the organization be second guessed by others, such as the public, media, investors or regulators because the project is perceived as a waste or misuse of funds?

What measures have been taken to ensure that the estimates and plans are sound? Have analyses been performed to substantiate what management has been told about the initiative?

Is there confidence that the funding (e.g., loans, bonds, cash flow, contributions) will be available at a reasonable cost when money is required? Does the financing payback period exceed the useful life of the project and will the use of additional funds be needed for replacement while still paying off the original obligation?

Are there adequate contingencies in place to handle unexpected surprises like modifications to specifications that lead to change orders? What is the fallback arrangement in the event scope changes exceed the funds committed to the project?

Are there perceived or real conflicts of interest in terms of the project governance structure and any relationships with the vendor planned to be used or with any private donors that may wish to contribute? Has determination been made as to the roles and responsibilities of individuals tasked with leading and/or managing the project, ensuring quality, making decisions, etc.?

Are the project milestones and performance standards adequately defined to ensure that there is contractual clarity and transparency from an oversight standpoint? What possible issues might be encountered in each phase and who will take on the risk mitigation function as they emerge? What safeguards would kick-in if design, construction or deployment errors result in rework, overruns or schedule slippage?

Does the organization have the competencies and availability to control the project or should resources be augmented with outside assistance? When should such support be obtained?

What skills are required for effective project monitoring and does the organization have the talent to perform this function? Does it have a protocol in place to simplify project decisions and resolve issues on a timely basis?

Does the project plan consider what factors might impact the proposed schedule and cost estimate that are beyond the organization’s control? How would the organization react if such issues were to arise?

Does the organization have confidence in the vendors and their ability to meet the organization’s requirements? Does the vendor have a track record of quality performance in delivering services or products similar to what are required? Is the organization overly reliant or dependent on specific suppliers or contractors and what options are available as a fallback?

Are there labor, health, safety and environmental concerns that have not yet been identified? What steps have been taken to address those concerns the organization is aware of already?

Is the project predicated on leading edge technology, such as software or equipment that has not been road tested elsewhere? Is the project so complex in terms of configuration, components, number of locations, or urgency that it creates enough uncertainty to put the project in jeopardy?

Whether the project involves technology, facilities, products or services, while there are no guarantees insofar as outcomes, there are some fundamental steps that can be taken to improve the likelihood of success.

Contact Us

If you believe your organization would benefit by having a trusted and experienced advisor help establish pragmatic approaches to project management or have an independent party evaluate your project playbook, you can reach out to Larry Baye, Risk Advisory Principal (lbaye@pkfod.com) or Mark Bednarz, Risk Advisory Partner (mbednarz@pkfod.com) who will be pleased to discuss your organization’s project.