Procurement update: Tackling programme uncertainty

01 / Introduction

Increased infrastructure investment in the UK is widely accepted as a critical enabler for accelerating growth and increasing productivity. However, the UK has an affordability and delivery certainty problem that constrains the volume and effectiveness of infrastructure investment. Typically, UK construction costs are some of the highest in the world, but UK infrastructure programmes also suffer larger cost and time overruns more often than in other countries. 

Certainty of outcome describes the degree of confidence that a programme will deliver its planned strategic benefits within an acceptable range of cost, schedule and performance outcomes.

Cost and time overruns mean that programmes do not deliver their planned benefits, and other investments might be scaled back. Placing too much attention on the assurance of cost and time targets risks a lack of focus on wider outcomes. In effect, the pursuit of false cost and time certainty undermines the achievement of programme goals. 

Investment programmes are evolving, with a greater emphasis on the maintenance, renewal and resilience of existing infrastructure networks. This adds further complexity and uncertainty. Not only does work on existing operational assets introduce issues of asset condition and access, but it can also increase the complexity of scope definition too. One example is the complex, iterative process of identifying an optimum combination of work across a network to deliver the benefit needed to justify the investment.

This is a problem that new client organisations will start to face as infrastructure investment becomes a key dimension of the devolution agenda. With strategic authorities taking greater responsibility for the definition and direction of infrastructure investment, their ability to deliver predictable, affordable outcomes will help to determine regional and national growth prospects.

Assured outcomes matter. Reliable, deliverable business cases support the optimum allocation of scarce investment, and when programmes miss targets, others are put at risk. This article examines some of the root causes of uncertainty associated with infrastructure programmes and the steps that can be taken to ensure the planned benefits of an investment remain affordable and deliverable.

The term “programme uncertainty” is used here to describe the risk of deviation from planned benefits, cost and schedule.

02 / Outcome certainty is a growing challenge 

The UK has a hugely ambitious infrastructure investment pipeline. The government’s 10-year investment pipeline, compiled by the National Infrastructure Strategic Transformation Authority (NISTA) has a total value of £725bn. The rate of delivery implies a 50% increase in spend over current levels. 

Such over-programmming – whereby the volume of work exceeds the capacity of clients to manage and industry to deliver – has wider implications associated with access to and competition for resources, sequencing dependencies and other sources of risk. The complexity of the delivery environment places a premium on the quality of planning and decision-making by clients and project teams. Evidence suggests that even at current levels of activity, UK practice does not deliver the intended outcomes. 

Data from Boston Consulting Group (BCG), for example, shows that comparable highway construction costs are 46% higher in the UK than the European average. However, even at that cost premium, the risks of time and cost overruns are higher in the UK, with 69% of measured programmes being exposed to overruns, of which 66% were severe.

Analysis by the National Audit Office (NAO) and other bodies repeatedly highlights that much of the uncertainty is driven by decisions within the programmes themselves. Furthermore, some steps taken to mitigate risk, including risk transfer mechanisms like lump-sum contracts, can result in larger cost and time overruns than might have occurred under alternative approaches.

In response to these delivery challenges, NISTA has updated its approach to the Government Major Projects Portfolio (GMPP), providing closer support to 80 out of 189 programmes, including a new mega-programme category that, in its first iteration, includes HS2, Sizewell C and the Dreadnought programme.

03 / Why programmes face problems 

No discussion of programme certainty can be complete without consideration of the work of Bent Flyvbjerg and his team at the Saïd Business School, part of the University of Oxford. Flyvbjerg is synonymous with his “iron law of mega-projects”, which states that schemes come in over budget and over time, over and over again. Flyvbjerg’s hypothesis is that incentives and biases built into the business case process favour optimistic proposals that prove impossible to deliver. Memorably, Flyvbjerg describes the outcome of the business case process as “survival of the unfittest”, whereby less realistic business cases are approved because of their exaggerated benefits. These investments require repeated change and intervention as they miss their targets while proceeding through planning and delivery.

This helicopter view understates the inherent difficulties of delivering complex programmes in complex environments but highlights that many of the tools used to manage complexity are not fit for purpose. Examples include:

• Early, ungrounded budgets and schedules that give a false impression of precision rather than acting as a constraint on scope.
• Fixed schedule dates that distort decision-making by forcing the selection of sub-optimal options, such as an early construction start.
• Risk-transfer mechanisms, such as a lump-sum contract, that include a cost for uncertainty without removing its cause.
• Assurance processes that fail to produce actionable insight because they focus on report production rather than corrective action.

Given the constraints of the toolset, it is perhaps not surprising that the practical issues faced on complex schemes can prove difficult to address. The table below highlights the key triggers across the business case, delivery model and governance.

The analysis highlights that triggers for uncertainty can be found at all stages of a programme. Some issues, including the scope and business case, are highly strategic, but others, such as the schedule allowance for contractor appointment, can be quite tactical. For example, allowing additional time for contractor selection ensures that a client retains the realistic option of stopping a procurement action if budget constraints cannot be met.

One key finding is that efforts to provide a greater guarantee of certainty of outcome can contribute to cost and delay. A good example of this is the impact of concessions granted during the planning process, which can distract the team from its focus on planned benefits. The planning veto wielded by consultees is often referenced as a major cause of scope creep and “gold plating” (when the project team adds extra features that were not part of the original scope), but does not actually reduce the risk of planning delays. Investment of time and resources in direct engagement to explain scheme benefits should deliver a better outcome.

Addressing the causes of uncertainty requires a holistic strategic approach focused on root causes. The next section considers the steps that can be taken to eliminate sources of uncertainty.

Table 1: Key triggers for programme overruns on time and cost

04 / Strategic initiatives to increase certainty

Strategic interventions can be thought of as activities that create significant opportunities to improve certainty as a by-product of effective implementation. Many of the benefits to outcomes will come from the elimination of inconsistencies or negative incentives that erode benefits. The following are examples rather than a comprehensive list of potential innovations.

Business case

• Define the problem in the business case Within the standard public sector five-case model (making the strategic, economic, commercial, financial and management case for a project), the strategic case should focus on the problem, not the solution. Defining the problem with specific and measurable goals makes it possible to maintain focus on the rationale for investment and demonstrate the outcomes. Benefit-chasing, the expansion of scope beyond the initial problem to improve viability, should be avoided.
• Adapt benefits realisation in response to change Measurable and supporting benefits underpin the business case but can change, even as programme objectives remain stable. Supporting real-world benefits such as job creation and improved accessibility are particularly important in maintaining local support during the disruption of construction. Benefits realisation needs to be dynamic, using leading indicators to track progress and real-time modelling to ensure targets will be met.

Delivery model

• Secure the value of time “Plan slowly and build faster” is a well-established principle, which aims to minimise the time during which construction risks can emerge by doing as much up-front work as possible. Programme certainty is built cumulatively from the definition of and focus on the problem to the evolution of leadership team capability over different phases of delivery. A key opportunity can be to build time into the schedule by sequencing suitable activities, such as contractor procurement in parallel with planning.
• Use portfolio management to drive certainty Portfolio prioritisation, capacity-aware investment planning and pipeline visibility are all means by which market capacity constraints can be addressed. 
• Address uncertainty in cost and schedule Reference case data or multiple estimates with confidence limits should be used to communicate inherent uncertainty and fully account for optimism bias. Estimates of cost and schedule should include all activities necessary to realise all benefits. Some of these estimates may be less certain due to an immature scope. Detailed plans including actions and incentives should be prepared to deliver savings when required to meet the budget.
• Align procurement to the business case Procurement is a strategic discipline and is a critical gateway to fixing project outcomes, determining the route to market and influencing behaviours. Well-executed procurement aligns requirements, communicates clearly to the market and builds confidence. The unintended consequences of under-prepared procurement could be delay, inconsistent documentation or, at worst, proposals that misread market appetite. Well-designed early contractor involvement (ECI), for example, will contain the right balance of incentives to maintain competitive tension during the second-stage bid.
• Eliminate rather than transfer risk Under traditional risk management, even with controls in place, the risk event can still occur. One solution is to eliminate risks through design or management intervention rather than mitigation. Use of pre-assembled components during a short access period is a good illustration of risk elimination. Only the most severe, critical risks can be managed in this way – a practice known as significant risk thinking, whereby culture, behaviours and compliance combine to provide the assurance needed on the programme. 

Governance

• Build and evolve governance capability Effective, coherent governance is a critical enabler of project success. The London 2012 Olympic construction programme and Heathrow Terminal 5 have both been praised for the effectiveness of their “single controlling mind” approach, which provided full visibility across the programme and enabled a full understanding of interfaces, cumulative risk and the impact of change. 
• Speed of decision-making adds to programme momentum and reduces inflation risk related to delay. Governance models should be able to evolve over time, scaling up as necessary to provide timely and proportionate assurance.

Together, interventions like these help to build progressive certainty by aligning budgets, governance, procurement and risk management with programme objectives. 

05 / Conclusion 

The UK faces many challenges in both attracting infrastructure investment from overseas and ramping up the capacity necessary to deliver large-scale domestic programmes. Viability and uncertainty of outcome reduce the attraction of the UK as an investment destination, decreasing project volumes. McKinsey research suggests that the UK delivered barely 60% of planned infrastructure investment between 2015 and 2024.

There is compelling evidence of the scope to improve delivery performance, but success depends on many conditions being in place. These include defining and protecting a programme’s strategic need and outcomes as an essential starting point, as well as, at a more tactical level, aligning delivery models with needs and market expectations.

All aspects of the design, organisation and management of a programme contribute to the certainty of investment outcomes. Programmes can be thought of as systems, with complex interfaces between elements and the potential for positive or negative feedback loops. Changes to elements of the system can potentially result in a change in performance. Understanding the impact of change, the presence of binding constraints and the effect of interfaces will all contribute to a better outcome.

Ultimately, greater certainty of outcome doesn’t come from confidence in prematurely fixed cost and time targets. It is rooted in a clear business case, in portfolio-wide actions that protect benefits and eliminate uncertainty, and in the retained flexibility needed to respond to changes as they occur. These are all conditions for success that are within the control of the client and the programme team.