AMEC debate, June 2006

How complex projects succeed: lessons for the 2012 Olympics and beyond

AMEC debate2

AMEC debate

How complex projects succeed: lessons for the 2012 Olympics and beyond

Introductory note

Most of the views and information in this article were derived from a round table lunch discussion, which AMEC organised and hosted on 31 May 2006 at St Stephen’s Club, Queen Anne’s Gate, London. The discussion was held under Chatham House rules.

This lunchtime debate invited participation from senior individuals from organisations involved in, or with an interest in, the delivery of ‘complex projects.’

The debate focused on infrastructure projects termed complex because of factors such as scale, diversity of interests, parties or streams of work involved, or environmental, social or economic challenges or requirements. A typical complex project would be to deliver the London Olympic infrastructure or Heathrow Terminal 5, which were specifically discussed. The lunch considered the challenge such projects pose, and the lessons learned so far. The debate was hosted by Sir Peter Mason, CEO of AMEC, and

was chaired by Nick Isles, Director of The Work Foundation. The guest speaker was Tony Douglas, who leads BAA’s project to deliver Terminal 5 at Heathrow. The other guests included:

Neville Chamberlain CBE, former chief executive of BNFL

Peter Fanning, Deputy Chief Executive, Office of Government Commerce

Jeremy Heywood CB, CVO, Joint Head UK Investment Banking, Morgan Stanley

Alan Jenkins, Chairman, Eversheds

Sir Michael Lyons, Chairman of the English Cities fund

Douglas Oakervee, OBE, FREng, Chairman, Cross London Rail Links

Rear Admiral Jonathon Reeve

John Stubbs, Project Assurance Manager, Shell.

How complex projects succeed: lessons for the 2012 Olympics and beyond 3

Infrastructure projects have long been seen as a way for individuals – and nations – to win glory. In the UK, the great 19th century enthusiasm for engineering projects allowed engineering pioneers such as Brunel to build their name. Later, during the early 20th century, Americans such as Frederick Taylor and H.L.Gantt took over their mantle as the world experts in project management.

Today, as the UK contemplates the largest, most complex, and mission-critical project any government is likely to undertake – the 2012 London Olympics – the chance for glory is ours again. But with it, inevitably, comes the chance for failure: failure not only public and punishing but, the UK media coverage so far would suggest – more than probable.

The Olympics is, of course, a one-off, but the challenge it presents is being replicated – and will be replicated - on a smaller scale across the UK in coming years.

Already, today, some visible sports projects are underway. Two major football stadiums have been in the news: the outstandingly successful new Emirates stadium for Arsenal and the notoriously failing stadium at Wembley. There are also major infrastructure projects that mimic many of the Olympic challenges: Heathrow’s Terminal 5 is nearing completion, and Crossrail in London is due to begin soon.

Before long, too the UK will have to take on large projects in the energy sector where old generation assets need replacing and the demand for more power continues to increase. So the question of how to deliver infrastructure assets to time, budget and specification is very topical.

2012 Olympics makes ‘complex projects’ a hot topic

A pioneering project - Brunel’s Clifton Suspension Bridge

The new Wembley Stadium has been beset with difficulties

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Signs of changeThere are many encouraging signs that the UK can, and will, do the job. In particular, the contracting culture and the associated contract model, have changed quite dramatically over the last decade. This is not always evident: the gestation period of large projects means that, by the time they are delivered, the model on which they were based is bound to be out of date this has not helped the reputation of PFI, where perceptions associated with the first projects lingered on long after the model had adapted and improved. But while some of today’s large projects may still attract negative PR, the basis on which tomorrow’s projects are being agreed and developed is very different.

The origin of the change goes back to the 1998 Egan report ‘Rethinking Construction’, which identified the need for change in the UK construction industry. In particular, it identified the destructive results of the antagonistic relationships that UK construction contractors usually had with their customers. While the industry has not universally taken Egan on board, it has certainly adapted, with more collaborative approaches and in some cases, genuine partnerships with clients emerging across the board.

UK associates large projects with failure – but why?As the UK contemplates the 2012 Olympics, we do so with a degree of cynicism. Helped by a naturally sceptical media, we tend to be pessimistic about large projects where our European neighbours would be optimistic. Some might link this to our culture, which doesn’t embrace the French concept of the ‘grand project’, or to our diminishing sense of ourselves as an industrial or an engineering nation – but others, including many journalists, would say it is simply down to our past record.

It is not just the media that is cynical. The UK government often appears to have no confidence in UK plc’s ability to deliver large projects – perhaps understandably so in the light of recent failures, such as Wembley. American contractors are seen as more effective – and were brought in to rescue a string of infrastructure projects that went wrong in the early ‘90s, from the Limehouse Link through to the Jubilee Line. Ironically, the US government hired UK contractors such as AMEC to clear up the World Trade Center or rebuild the Pentagon.

But the fact is, that the UK is probably no more or less successful than any other nation when it comes to delivering large projects. Around the world, some projects succeed, and others fail. There are US successes – Exxon is often seen as best-in-class when it comes to major oil and gas infrastructure – and there are US failures, like the Boston ‘Big Dig’, for example, a huge complex transport scheme in Boston, which was finally delivered many billions of dollars over budget and five years late. And the same is true in most countries.

It is, nevertheless, hard to understand why the UK contracting and engineering industry managed to build the entire Gulf infrastructure during the 1970s, but failed to build UK infrastructure in the 1990s. Mysteriously, projects like the Jubilee Line extension often foundered due to quite simple neglect of basic planning: the design was totally inadequate when construction started and never really caught up. Huge cost escalation inevitably followed.

Project statistics from the National Audit Office and the DTI in the UK imply that a new, complex project like the Olympics would be likely to be over a year late, be more than £1 billion overspent and involve six fatalities during the construction. How do we ensure that we don’t make the same mistakes again?

A ‘grand project’ - the Louvre in Paris

5How complex projects succeed: lessons for the 2012 Olympics and beyond

The pre-Egan, or traditional commercial contracting, approach is essentially competitive. It views a construction project as a negotiating ground for the client and the contractor: one of the two will win the negotiation and one will lose.

In its ideal form, the modern contract is the opposite of this. It involves all parties on a project having their success linked not to beating their counterparty, but to the success of the project itself. In this way, they all cooperate to ensure that outcome. This also encourages parties to the project to look beyond their own organisation’s goals, to think about broader economic or social value they can create, and how this will benefit all.

Egan is no longer new – but it may be that its time has come. One of the recent major trends in the corporate world has been the trend away from looking at simple profit, to the wider benefits of social responsibility. While CSR was a bandwagon a decade ago, there is now a ‘second wave’ of CSR commitment which is genuine, rather than token – because companies now recognise the economic link between good corporate behaviour, and shareholder value. Wider benefits for employees, community and wider stakeholders flow back to shareholders, as the company extends and protects its reputation and franchise to operate.

This growing trend is mirrored in what has happened to the ‘complex project’ sector. Large, complex projects have a major impact on the communities where they are developed. Organisations involved in these projects, whether private or public sector, are realising that by making the project a success, they can achieve a much greater benefit for themselves, and for all, than if they aimed to profit at the project’s, and each others expense.

More complex projects demand flexibilityTraditional contracts between the client and contractor rarely acknowledged, or allowed for, change in the specification of the project. This meant that when unforeseen problems occurred, or new technologies needed to be introduced, the parties were bound to end up negotiating, or even litigating, over whose responsibility these were.

While, in the past, a sensible client or contractor could manage their way round such a model, this is unlikely to be true in the future. Technology moves ahead apace, and the traditional contracting model will be increasingly inadequate in the future, as clients plan more complex, risky and unique projects. A major airport or London Olympic stadium needs to integrate many systems and then go live smoothly, on day one. This means sufficient time needs to be planned to achieve readiness; it can’t be left to chance. The old model will struggle to accommodate the level and pace of change required.

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Acknowledge – and assign - risk up front In the past, risk and uncertainty were denied, until they arose. In the new model, the parties agree to work together to resolve project risk, rather than trying to avoid it or foist it on each other. There is an acceptance that it is not possible to predict with certainty all of the challenges that will arise. Instead, you choose capable partners, and work with them to find the best solution. You also need to allocate the risk up front. Typically, when parties work together on a major project, the big issue they face is who carries the risk. If this isn’t clear, there will be arguments down the line. In the T5 project, the client - or project owner - essentially carries all the risk, and the contractor gets a set profit for delivering his share of the work. The key point is that risk should be borne by the party best placed to manage it. This contrasts with old-style projects where the contractor would haggle over what he should be paid for his risk.

Fix the contractor’s profit up front A related point. Contractors get a set margin for doing the job, which means they aren’t motivated to negotiate or squeeze more out of the contract at the expense of the client. The incentive for them is the guaranteed profit, reputation, plus the promise of future work.

Work on an open book basis As a quid pro quo for their secure profit, contractors show what they are spending, rather than hiding it from the client. Project risk is shared and, where possible, insured centrally. The old approach of imposing financial penalties fails if the contractor goes bankrupt three-quarters of the way through the project; this damages reputations. Equally, a sub-contractor can blame another sub-contractor for late delivery, pushing the blame down the line. This can only be overcome by a good relationship and an open book approach, where everyone is motivated to complete the project. This avoids all the best brains on a project being focused on making claims instead of on completing the project.

Making it work - three lessons from Terminal 5

The emerging contractual modelAgainst the background of these lessons learned, a new contract structure – that can be called a new project model - is also evolving. It is easier to embrace the philosophy than to put it into action. However, already, some major projects are working, and working well, to the new model. Terminal 5 at Heathrow is a particularly powerful example of the new model in action – and, with the project 80 per cent complete, it is working.

The key elements of the new model can be expressed in different ways, as shown opposite with an example from Terminal 5.

7How complex projects succeed: lessons for the 2012 Olympics and beyond

This model, while it is eminently sensible, could seem counter-intuitive. Competition is seen as the driving force of our society – how will the client get good performance out of a contractor who knows his profit is protected? Equally, will client and contractor really be able to align their objectives?

The experience of Terminal 5, for those working on it, proves that neither of these concerns have proved a real obstacle. For the contractor, working for a longstanding customer, and one

he wants to keep, is sufficient motivation. Both their reputations are at stake if the project fails. Even though profit is protected, a contractor like AMEC will work even harder on a project like Terminal 5, to deliver against the target cost for the client. Often, the client’s team and the contractor’s become one team, indivisible, and this is a real behaviour change. Working alongside the client, day to day, puts enormous pressure to perform, so the project will almost certainly be delivered on a lower cost basis than a project using the old model.

At T5 BAA decided on and allocated all risks up front

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Understanding that new model is one thing, but how do we apply it as we face the Olympics deadline? The Olympic project faces particular challenges, which we should not underestimate. Thinking about these, we can also consider how they will affect other major projects on the horizon – such as nuclear power stations, for instance.

Competing demands on government The Olympics or Crossrail are only two on a long list of over 100 current public sector projects in the UK. It is easy to underestimate the sheer scale of the portfolio of projects that the government has to manage. It is important to ensure that projects like the Olympics or Crossrail do not compete for scarce resource, or interfere with each other, operationally or financially.

The deadline Benchmarking has taught that schedule-driven projects tend to fail, and the Olympics risks being driven by the 2012 deadline. Has enough time been spent planning, and clarifying the project objectives? Has there been sufficient clarification of the positive outcomes desired, rather than simply all the potential pitfalls?

Decision-making will be hard It is notoriously hard for government to be a quick and effective decision-maker. But experience teaches that a project needs a visible single leader who commits to handle government, funding and putting together a winning team that will deliver early. Does the Olympics really have someone able to lead and make decisions across the piece?

Quality of the government’s managers? With hundreds of big projects on the go, it is hard for government to ensure it has the right project managers at the top level. With a deadline-driven project, finding the right person to drive it is particularly critical. While government is quite familiar with what it should in theory do on a large project, (thousands of people daily do exams on the subject), it doesn’t have enough people who know how in practice to intervene, or implement.

A tight construction market The tight supply in the UK construction market means it could very easily become overheated. The Olympic project potentially affects the whole industry across the South East of the UK, and if it fails, it could have a domino effect across the region. More generally, there is an acute skills shortage in pure engineering and project management worldwide – and the contractors working on the project may find it hard to get the quality of staff they need.

More generally, the Olympic project faces the challenge that arises whenever public and private sector work together. While the public sector focuses its efforts where its own risks and rewards lie - the decision to commit, or not, to a project – the private sector’s emphasis, like its own risks and rewards, lies with delivery, or not, to time, cost and specification. The two worlds at the moment abut, but often do not really understand or respect each other. For the Olympics to succeed, it will be important to avoid a gap between the decision that a project will go ahead, and the delivery of the project itself – into which the project could fall. In particular, government departments involved may need to invest more time into understanding and establishing detailed delivery objectives.

Applying it to the Olympics – will it work?

The Olympics will dominate public sector projects over the next few years

How complex projects succeed: lessons for the 2012 Olympics and beyond 9

Can the government change its spots?A key lesson learned in recent decades of complex projects is that unless the client operates in a sensible way, it is very difficult for a complicated project to be managed properly. Because the client owns the project, the onus is very much on the client to shape it, and demand the right contractual model – to be, in short, an intelligent client. Since that client so often is a UK public sector agency, much of the responsibility for Olympic success – and the success of forthcoming large projects - must lie with government itself. Pressure will mount, too, as contractors, some burnt by bad experiences, become less and less willing to work for any customer, albeit government. Already, the industry is withdrawing from some sectors of the market, because the risk-reward characteristics make these just too unattractive. Private sector companies, answerable to shareholders, cannot afford to enter into government contracts that oblige them to sink high up-front costs with no security, or to carry project risk which their shareholders will not countenance.

The good news is that the level of government commitment to best practice appears high. The Treasury and the National Audit Office are committed to improving procurement securing the lowest price does not drive their approach as it did in the past.

Some departments have changed their procurement method quite dramatically in recent years. In the Department for Transport, a National Audit Office study done a few years ago showed that the average outturn cost compared to the average bid cost of a toll road or motorway was 29 per cent higher than the bid. The DFT addressed this by changing its approach to procurement, engaging contractors at a very early stage, as part of the team that will take the project from concept, through public enquiry, if necessary, and into detailed design and eventually to pricing. This represented a big step forward. The Highways Agency has also applied Egan principles, involving itself in managing the market, identifying good contractors and building a relationship with them in a way it would not have done in the past.

Other departments have found it less easy to change. The MoD approach to procurement has been criticised heavily by the National Audit Office, for instance. Insiders say this may be less to do with lack of willingness to change, than lack of ability. It may be that the department itself needs to go through more internal change as an organisation before it can really become the intelligent customer. And again, this may be a question of developing skills and resources, in a tight market.

Change of this kind is not easy, particularly given the diverse and fragmented nature of government in the UK. But it may now be time for a more wholesale review of the way government and the private sector work together, starting from the recognition that they still frequently interact in the competitive spirit that Egan identified in his report.

AMEC is working with the South Korean government to deliver the

Incheon Bridge

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Partner, don’t contract More and more assets today are procured on some form of alliance or partnering structure, where the client and the suppliers are aligned and sharing goals. Here, the real key is that the focus is on the project, and the project’s goals, not on the individual players. A good example of

Words to the wise: success factors for the Olympics

Over the last decade or so, those involved in procuring and delivering large assets have learned some broad lessons about what makes a successful project. Many of these lessons were learned first in the offshore oil and gas industry, and transferred. Today, they are becoming widely accepted. Some of the most important are listed below.

Despite these challenges, there are many reasons to be positive about the Olympics. The project has the willpower and expectations of many powerful bodies behind it. The International Olympics Committee, an international organisation with high expectations, will insist on controlling, for instance, policing, and other aspects of the Games which it sees as mission-critical.

Meanwhile, the UK government has much at stake – and Gordon Brown has signed a commitment to deliver the funding. The government is looking for a professional partner to deliver the Games it has committed to ensuring there is not only just one minister, Tessa Jowell, in charge overall, but a clear, single source of managerial authority for the project inside the Civil Service.

where this has worked, and helped transform an industry, is the North Sea, where perhaps 30 per cent gains were achieved when the industry moved to a new, cooperative working model. If you work with a partner, not a client or a contractor, you have the basis for this model.

Plan up front A badly planned project will take three times longer than expected and a well planned project will just take twice – they say. Clarity about the objectives of a project is hugely important, and often neglected. You can end up with one party thinking they are going to receive a Rolls Royce at the end of the process

where, in fact, the other side is planning to deliver a Mini.

Align stakeholder objectives One reason planning a project is vital is because you can identify the interests of the parties, and build a relationship that will see you through the ups and downs of the project. Preparation, building the relationship and identifying the community of interest will mean little need for legal intervention.

Expect the unexpected Planning needs to cover the unpredictable. Many contract structures have no plans to deal with change, although everybody knows there is going to be change. Contracts can’t be rigid; they need to recognise the outturn is going to look somewhat different to original expectations.

Government commitment to the Olympics gives comfort

Successful project delivery creates a lasting local legacy

How complex projects succeed: lessons for the 2012 Olympics and beyond 11

SummaryOur understanding of what makes a ‘complex project’ succeed, or fail, is constantly evolving. Over the last decade or so, we have learned some particular lessons that should help us ensure that the 2012 London Olympics is not only a success as a project – delivered to time, budget and specification – but a success for London for the long term. In particular, we know today that a key to success will be ensuring that all stakeholders – not just the project partners – work together to make the project succeed. That means their goals must be aligned with the project goal – no small task in this case.

We also know that we need to think long and hard about the project upfront, taking our time to plan and build relationships. We have to acknowledge that there will be change as the project evolves, over its long lifetime, and be flexible enough to accept and indeed embrace that change. The partners on the project will have to work openly together, across the boundary between the public and the private sector. This will mean change on both sides, but probably particularly challenging change for government, whose own complexity and diversity means it finds change far harder. It is up to the private sector, and those of us who have worked on, and learned from, the large projects of the last decades, to help them make it happen.

Spend up front Benchmarking work shows that if you front-end load a project, you will do better. In the UK, we tend to spend too little in the upfront planning phase. This causes problems, especially when it comes to building something on a one-off basis, like Wembley stadium. Problems multiply if the client is inexperienced, or in the not-for-profit sector: their ambitions outstrip the budget and they are inexperienced in structuring the project. Government, too, needs to take this point on board.

Find a Mr or Ms Olympics Have one person in charge: The two most successful defence programmes in the last 40 or 50 years, Polaris and Trident, came in on the day and to cost, but they had somebody very clearly defined as being in charge. What we have learned from projects suggests that one success factor for the Olympics is a ‘Mr or Ms Olympics’, who will make it happen.

Don’t be price driven Projects are a team game. If you are going to be successful, you need to put together a good team. The bidding process that is often used is fundamentally

flawed because it is cost-driven. To use an analogy from football, if a company was looking for a striker, and the Board picked the cheapest of three, they would end up with someone who could play football, but not well. Company tender Boards often want to go to the cheapest bidder but are disappointed when they don’t win the championship. Many companies are short of resources and of quality people – so they fail.

Don’t ignore the local choice A successful Olympics must work with local stakeholders to create a local legacy. It will be tough for a non-UK party, with no supply chain relationships, to do the job, particularly if they do not have good labour relations. If UK players get the structure right, they can deliver. Encouragingly, the Olympic Delivery Authority is using three projects delivered by UK contractors – the Arsenal stadium, T5 and Ascot - as benchmark projects for the Olympics.

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AMEC plc is a focused supplier of high-value consultancy, engineering, and project management services to the world’s energy, power and process industries. With annual revenues of over £2.2 billion, AMEC designs, delivers and maintains strategic and complex assets for its customers. AMEC’s Natural Resources, Power and Process and Earth and Environmental businesses employ approximately 18,000 people in more than 25 countries globally.

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