One of the biggest risks when an entity engages a contractor or consultant is the outsourced project or service costing more than first anticipated. Any efficiencies that were expected from the outsourced arrangement can quickly dissipate when a project isn’t managed well.

What common factors increase the risk of cost overruns?

Our report on Contract management for new infrastructure (Report 16: 2021–22) emphasised the importance of effective contract management. This can reduce cost and time overruns, and ensure value for money and delivery of a project’s intended benefits.

Project overspend is usually due to the following factors:

• Scope creep or variations – these often lead to cost overruns or a failure to achieve original project objectives. This results in delays, redefined project deliverables or milestone dates, and increased labour and material costs.
• Unclear roles and responsibilities – roles and responsibilities not understood or executed poorly often result in inefficiencies that usually become increased project costs.
• Ineffective governance arrangements – reporting lines can be unclear or project status may not be reported at all. Some entities have several governance committees, and it’s unclear which is ultimately responsible and who needs to be across the status of projects and contracted arrangements. Entities can have too few, or sometimes too many, governance committees that often contribute to the lack of clarity and empowerment for those responsible. Some may have many sub-committees that do not report up to key governance committees. If they do, they may give a filtered update, omitting critical information. In both instances this can leave those charged with governance ill-informed. In our report on Contract management for new infrastructure (Report 16: 2021–22) we identified examples where entities had projects that lacked appropriate oversight. This ended up impacting project budgets and timelines.
• Ineffective partnering – this can be between the contractor/consultant and the entity, but also across governance committees or even different government entities working together on a project.
• Failure to regularly reflect and assess performance – a common mistake as the project continues. Performance assessments can also be forgotten at project completion, leading to contract rollovers that don’t consider learnings from the previous project, and repeat mistakes.
• Organisational culture – some entities foster a culture where ‘bad news’ is not tolerated, and responsible officers may feel apprehensive to report on all, if any, project issues. Filtering project updates not only misleads decision makers, but reduces their ability to make informed project decisions, and take effective, timely action to remedy identified issues.

What can happen if you don’t effectively manage your costs?

When an entity does not effectively manage its costs it can result in poor outcomes, unintended consequences, and changed behaviours, all stemming from cost overruns.

• Optimistic/filtered reporting – there may be a culture shift as project owners try to dilute bad news, and subsequently push this approach down, pressuring other team members to follow. Accuracy and depth of reporting up to key governance committees may be impacted as project owners attempt to suppress or put a positive spin on ‘bad news’.
• Increased fraud risk – fraud isn’t always stealing or misappropriation of assets. If a project is being mismanaged, it could appear as timesheet fraud. Project team members could also be seen taking the liberty to falsify records and hide project overruns and underperforming projects, to mislead those charged with governance.
• Impacts to project delivery – cost overruns may see projects never reach completion, or be significantly descoped, and subsequently not meet the initial project objectives. We observed this in our report on the state’s procurement of Sunlander trains, Traveltrain renewal: Sunlander 14 (Report 8: 2014–15). The project set out to deliver a luxury trainset of 3 x 14-car trains, only to later identify full capital costs would exceed the board-approved budget. This resulted in a significantly reduced product of 3 x 9-car trains. Although pitched as a saving of $50 million due to a reduced scope, just over $50 million in written-off costs were ignored. The reduced model meant it could not deliver on the design and quality of service that was initially announced.

How can you manage your costs better?

Below are some key strategies that we recommend clients implement to ensure better cost management:

• Setting a realistic budget – from the start, entities need to consider what it will actually cost to deliver a project. And ensure it’s consistent with what is agreed with the contractor or consultant. The actual spend on past projects should be used as a benchmark to set a realistic target. They need to equally commit to this budget through a written agreement, with a commitment to early notification of overruns – before they happen.
• Budget monitoring – budgets cannot be set and forget. They need regular oversight and to be aligned to key deliverables, so it's possible to conclude at any one point in time if a project is on track or not. Regular budget monitoring becomes critical when navigating structural and legislative changes during a project to avoid high costs. We observed this in our report on Monitoring and managing ICT projects (Report 1: 2018–19).
• Appropriate oversight – it is one thing to set a budget, but unless this is reported up to those charged with governance, then there is no accountability. Entities need to ensure appropriate committees have oversight to avoid reports only reaching steering committee level and failing to reach the board or executive leadership team. The team needs to have an appreciation for all key projects and related risks throughout the project life cycle; not just when there’s bad news. In our report on Delivering successful technology projects (Report 7: 2020–21) we recommend boards and executives actively challenge the progress and performance of their projects.
• Performance management – while you might have a budget and it might be reported to a committee, one person needs to be responsible, with consequences for failing to meet budgets. Including project delivery as a performance measure in their individual performance assessment helps to ensure accountability.

This blog represents the fourth in a suite we have been publishing on contract management. Our final instalment will cover benefit realisation.

Resources

• A contract register is more than a list
• If you don’t set clear measures, you can’t effectively monitor performance
• For a successful contract – planning is key!
• Contract management for new infrastructure (Report 16: 2021–22)
• Traveltrain renewal: Sunlander 14 (Report 8: 2014–15)
• Delivering successful technology projects (Report 7: 2020–21)
• Monitoring and managing ICT projects (Report 1: 2018–19).