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The Five Inherent Risk

FactorsExplaining Why Projects “Fail”

Paul EmanuelliGeneral Counsel and Managing Director

Procurement Law [email protected]

416-700-8528

www.procurementoffice.com

mailto:[email protected]

http://www.procurementoffice.com

Copyright Notice

The following excerpts are from the forthcomingThe Art of Tendering: A Global Due DiligenceGuide (Procurement Publishing Office, 2019) andare reproduced with permission. The furtherreproduction of these materials without the expresswritten permission of the author is prohibited.

© Paul Emanuelli, 2018

For further information please contact:[email protected]


About the AuthorPaul Emanuelli is the General Counsel andManaging Director of the Procurement Office. Hewas recognized by Who’s Who Legal as one of thetop ten public procurement lawyers in the world.His portfolio includes advising on strategicgovernance in public purchasing and onnegotiating high-profile major procurementprojects. Paul has an extensive track record ofpublic speaking, publishing and training. He is theauthor of Government Procurement, The Laws ofPrecision Drafting, Accelerating the TenderingCycle and the Procurement Law Updatenewsletter. Paul hosts a monthly webinar seriesand has trained and presented to thousands ofprocurement professionals from hundreds ofinstitutions across North America through theProcurement Office and in collaboration withleading industry organizations including NIGP,SCMA, the University of the West Indies andOsgoode Hall Law School.

The Five Inherent Risk FactorsOverview

This discussion introduces the five inherent risk factors thatimpact major public sector procurement projects, and explainshow these factors contribute to overly optimistic planningassumptions and impose unrealistic expectations on majorproject teams.

The Five Inherent Risk FactorsThe Flawed Execution Fallacy

Incompetence Inefficiency

The Flawed Execution Fallacy assumes that public sectorproject failures can be blamed on project-level incompetenceand inefficient institutional-level project managementmechanisms.

While partially true, this accounts for only 40% of the inherentrisk factors that plague public sector procurement projects.

Systemic Structural Flaws caused by senior-levelindecision, interference, and inadequate resourcing completeThe Five Inherent Risk Factors that undermine major publicsector procurement projects.

Indecision

Inadequate Resourcing

Interference

The Five Inherent Risk FactorsSystemic Structural Failings

Incompetence


Inefficiency

Indecision

Five Risk Factors

Interference

The Five Inherent Risk FactorsThe Full Picture

Ontario Pays $8 Billion “Extra” for P3s Auditor General of Ontario, 2014

By way of example, in its 2014 annual report findingsentitled Infrastructure Ontario – Alternative Financingand Procurement, the Auditor General of Ontariodetermined that the government’s use of the privatesector to finance and deliver major infrastructureprojects through public-private partnerships (P3s),referred to in the report as Alternative Financing andProcurement or AFP, cost the taxpayer an additional $8billion in project costs when compared to moreconventional government-run procurement projects:

When the province constructs public-sector facilities such ashospitals, courthouses and schools, it can either manage and fundthe construction itself or have the private sector finance and deliverthe facilities. For 74 infrastructure projects (either completed orunder way) where Infrastructure Ontario concluded that private-sector project delivery (under the Alternative Financing andProcurement [AFP] approach) would be more cost effective, wenoted that the tangible costs (such as construction, financing, legalservices, engineering services and project management services)were estimated to be nearly $8 billion higher than they wereestimated to be if the projects were contracted out and managed bythe public sector.


However, the report stated that according toInfrastructure Ontario, these additional P3/AFP costswere offset by avoiding the additional cost overruns anddelays that would have occurred had the public sectordirectly managed those same projects:


However, this $8-billion difference was more than offset byInfrastructure Ontario’s estimate of the cost of the risks associatedwith the public sector directly contracting out and managing theconstruction and, in some cases, the maintenance of these 74facilities. In essence, Infrastructure Ontario estimated that the riskof having the projects not being delivered on time and on budgetwere about five times higher if the public sector directly managedthese projects versus having the private sector manage theprojects. It valued the cost of the risks under public sector deliveryto be $18.6 billion and the risks under AFP delivery to be $4 billion.


While the Auditor General acknowledged that theprojects in question were delivered “on time and onbudget”, it ultimately concluded that the tangible projectcosts were $8 billion higher in direct financial impact tothe province when compared to the estimated costs ofdirectly managing those projects:


While projects managed by the private sector for the most partwere delivered on time and cost about the same as their contractsspecified, according to Infrastructure Ontario’s estimates, thetangible costs are still almost $8 billion higher than if the publicsector had been able to contract out the projects to the privatesector and oversee their successful delivery. Successful deliverymeans on time and on budget, and ensuring that the infrastructureis properly maintained over its useful life. Infrastructure Ontariobelieves that private-sector financing contributes to the successfuldelivery of complex projects under the AFP approach, but shouldonly be used to the extent that is required to transfer risks.


The private sector initially finances construction of AFP projects,but, as with projects delivered by the public sector, the provinceultimately pays for these projects under the terms of their contracts,some of which are up to 30 years. The March 31, 2014 PublicAccounts reported almost $23.5 billion in liabilities andcommitments relating to AFP projects that the present and futuregovernments, and ultimately taxpayers, will have to pay. However,the financial impact of AFP projects is higher since the province hasalso borrowed funds to make the payments to AFP contractorswhen the various projects reached substantial completion. Theseborrowed amounts, which we estimate to be an additional $5billion, are part of the total public debt recorded in the March 31,2014, Public Accounts.


As this audit report illustrated, the retroactiveassessment of project success will be based, at least inpart, on whether a project came within its original costestimates. However, when those original estimates arebased on questionable calculations and assumptions,the entire benchmarking exercise can be called intoquestion.


The Auditor General’s after-the-fact cost assessmentsin this report were a highly speculative apples-to-oranges contrast between the lower estimated costs forgovernment-run projects (which are debatable sincegovernment cost-and-time estimates for conventionallyrun projects are notoriously unreliable), and the actualcosts of the P3/AFP approach.


While the actual costs for the P3 approach may havebeen higher than the estimated costs of conventionallyrun projects, additional P3 costs are rationalized byInfrastructure Ontario through another speculative andhighly questionable assessment.


This evaluative process purportedly examined theactual costs for the conventional approach whenfactoring in risk costs for government-led projects asfive times the risk of P3 projects (e.g. $18 billion risksfor conventional approach vs. $4 billion with the P3/AFPapproach). In other words, the findings that the P3projects were “on budget” relied on, at least in part,“cost savings” calculations based on the assumptionthat government-led projects have a project failure riskthat is five times higher than initial project estimates.


As this report illustrated, governments that use theP3/AFP approach tend to pay a high-risk premium toprotect the taxpayer from government ineptitude. Evenso, while P3 projects presumably save money byshielding the taxpayer from governmentmismanagement, the question yet remains: How muchcost savings could be realized if government institutionssimply ran their own projects competently, based onrealistic cost and time estimates?


Incompetence


Inefficiency

Indecision

Five Risk Factors

Interference

The Five Inherent Risk FactorsThe Full Picture

Time

Cost

The Systemic Structural Flaws of indecision, interference,and insufficient resourcing result in overly optimistic andunrealistic cost and time estimates during project planning.This dooms project teams to failure even before projectincompetence and institutional inefficiencies help toexacerbate and obscure the initial planning flaws.

Flawed initial estimates

Flawed Project Planning

1

1

Flawed Project PlanningProject teams are then assessed as achieving marginalresults or as major failures when they fail to meet theseflawed cost-and-time estimates.

1

2

3

1 2 3

Cost

Time

Time

However, the planning estimates used for Ontario P3projects (which rely on external design, delivery, andfinancing rather than direct government project delivery)illustrate how subjective these planning assumptions can bein establishing expectations. As the Auditor General’s reportshowed, P3 planning may begin with the same unrealisticanchoring estimates applied to other major projects.

Same flawed initial estimates


1

1

Cost

Time

Cost

Yet, P3 planners then added an ineptituderisk multiplier of five to quantify thetheoretical risk of government directlyrunning its own project.

Flawed Project Planning5

5

1

1

Time

Cost

This false benchmark resulted in P3s beingdeemed “on time and on budget” whenactual cost and delivery was less than five-times over the original estimates.


5

5

1

1 2 3

2

3

Time

Cost

The same outcomes in government-runprojects would be deemed marginal results oreven major project failures.


5

5

1

1 2 3

2

3

Time

Cost

The P3 false benchmark obscured theadditional P3 transaction and financingcosts calculated by the Auditor General inthe billions of dollars for Ontario projects.


5

5

1

1 2 3

2

3

Time

Cost

Turning back to government-led initiatives, projectteams tasked with executing projects based onunrealistic time and cost assumptions are doomed tofail before they even begin. More realistic planningestimates are required to better assess the success ofdirect project delivery by public institutions.


1

1 2 3

2

3

Time

Cost

2

1

1

3

5

2 3 5

While the five-to-one P3 risk multiplier appearsextreme, doubling typical time-and-cost estimateswould create more realistic project benchmarks.


The Five Inherent Risk FactorsConclusion

Establishing more realistic cost-and-time estimates for majorprojects would put public institutions in a better position toassess whether their project teams missed, met, or exceededexpectations.

This in one example of how a better understanding of the FiveInherent Risk Factors can help improve the delivery ofgovernment-led major procurement projects.

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For more information please contact:

Paul EmanuelliManaging Director and General Counsel

Procurement [email protected]

416-700-8528

Marilyn BrownSenior Counsel


416-700-8531

Heather BakerSenior Procurement Advisor


416-700-8537

Julia MillsSenior Procurement Advisor


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