The black art of budgeting for innovative projects

Humans are predictable beasts. When it comes to difficult projects, we tend to underestimate the likely complexity of them and overestimate our ability to deal with whatever arises.

It should be no surprise then that a project of the scale and difficulty of the Gorgon liquefied natural gas pipeline – initially estimated to cost US$37 billion to build — would run off the rails.

And it has. Chevron Australia has slowed down the project due to the overrun, with its CEO, Roy Krysywosinski, blaming the high Australian dollar, the industrial relations system, the carbon tax and poor productivity.

A talent shortage is part of the problem, says the engineers union, the Association of Professional Engineers, Scientists & Managers Australia (APESMA). “There are many factors that have caused this blowout but there is no doubt the Gorgon project is paying the price of an acute engineering skills shortage,” says Bill Jackson, APESMA president.

However, project management and complexity experts say projects always contain risk, and this is heightened when the project is innovative. Dr Walter Fernandez, associate professor at the college of business and economics, Australian National University, says: “If you are doing a big project, like an airport, you can predict the risk more easily, but when you are doing something innovative, you cannot possibly understand all the complexities you are going to encounter.

“We do the budget at the worst possible time, at the beginning, when we know least about the project, and then during the project, we figure out how much it will really cost.”

The Gorgon project won an Engineers Australia award this year for Environmental Engineering.

At the time, Ian Pedersen, chair of the National Engineering Excellence Awards national judging panel for Engineers Australia, said of the project: “The construction of the Gorgon Project Shore Crossing involved meticulous planning and construction of a shore-based crossing to transport gas via subsea pipelines, while preserving the natural environment of the shore-based project site, Barrow Island.”

Speaking to LeadingCompany today, Pedersen says the project deserved its environmental excellence award. In relation to the cost blow-out, Pedersen says: “With some of these projects, it is the first time they have been done. It is not like a box of cornflakes; these are leading-edge projects there is always some unknowns in the outcomes and methods.”

Pedersen says the meticulous attention to detail in the project was appropriate and inevitably led to knowledge that changed budget predictions.

“What is important about this project was the commitment to investigation, concept development and detailed planning.”

The lead times involved in major projects is another complication, Pedersen points out. “Imagine trying to predict what technology will be like in five years’ time, or what the dollar is going to be. There is two or three years of investigation before they get started, and if you look at what the dollar was like years ago, it demonstrates the problem.”

The difficulty of delivering projects that have not been done require project managers to identify precisely where the risk will be, and who is most appropriate to estimate it, says Stephen Abrahams, a consultant in project management and strategy at the Australian Institute of Management. However, Abrahams points out that blow-outs of 100% and even 500% are quite common. Look at Federation Square [in Melbourne], that was meant to cost $120 million and it cost $400 million, or Myki, which started at $800 million and is now $1.5 billion.”

Abrahams says this is not an excuse for the Gorgon cost blow-out, and the question now facing the parties involved is whether the costs are now fully accounted for. “What I would be concerned is what are the factors that haven’t been considered and what still remains to be considered.” He says. “What else is still not factored into the project.”

Fernandez says that IT projects typically allow a contingency of double or triple the original budget for innovative projects (he specialises in complex IT, and says it’s hard to comment whether this is the case outside the IT sector).

The commercial tender process adds another element into the mix. Abraham says: “The old adage is don’t confuse sales with delivery,” by which he means that the sales team wants a low cost project to win the business and the delivery team wants all the resources to get the job done.

“If every project delivery team had the opportunity to scope the resources, they would never win the work,” he says.

Engineers Australia’s Pedersen says quality is real issue, and time and money have to be seen in this context. “What is important in any project is a commitment by the company to do it right. If they found they had to change a direction, they did it right. The damage to the environment and project viability is affected by rushing through and putting through the wrong solution.”

Kath Walters is the editor of LeadingCompany and an award-winning journalist of 15 years’ experience. Kath was previously a senior writer and editor at BRW magazine covering management, strategy, finance, entrepreneurship and venture capital across all industry sectors. In 2006, Kath won the Citibank Award for Excellence in Journalism (General Business). Follow her on Twitter.

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