How risk management can help reduce infrastructure overruns

Infrastructure projects are high on the agendas of governments, and the infrastructure development and investment pipeline is huge.

The global project pipeline is estimated at present to be $9trn, with Asia accounting for one-third of this.

Unfortunately, however, many of these major projects will suffer from cost overruns and delays.

But proper risk management can help mitigate this, according to 65% of Asia-Pacific risk managers involved in infrastructure projects (see graph below).

Singapore-based Kevin Kwok, head of enterprise risk management for City Developments Limited, says volatility in the external environment is a key driver of project overruns.

“The external operating environment has become volatile in terms of costs escalation due to disruptions from nat cats, supply chain and rising regulatory impact,” he says.

“For example, domestically, the cost of construction in Singapore has been creeping up after [the] government tightened foreign worker quotas for local companies. It is expected that our main contractors and their sub-contractors will face a labour crunch and very often these costs are not necessary foreseeable at the tender stage which then leads to cost overruns.”

Kwok says the other major contributor to potential cost overruns is the changing regulations.

“Again from a Singapore perspective, the building code and urban design requirement are evolving and with each small “tweak” to existing rules, impacts can be felt in our on-going projects to include or to at least attempt to comply with these changes.

“The outcome is very often variation orders to our original contract which may then lead to cost overrun for some local real estate contracts,” he says.

But Lendlease group head of risk and insurance Kevin Bates says risk managers can do more to decrease the risk of cost and time overruns.

“Most overruns come as a direct result of the competitive tension in a bid situation,” he says.

“Clients want speed and cost efficiency and, as a result, programme and budget need to be engineered to be as economical as they can be.

“This of course means that float and contingency are eliminated. The downside, in addition to this, is that the client contractually passed both time and cost risk on to the contractor, while retaining the upside risk in that the contingency and float have evaporated in the bid stage.

“If the client accepts that, contractually, the risk of time and money rests with the contractor, then they need to allow for appropriate float and contingency. If they want to retain the contractual risk themselves, then they need to allow for mechanisms to adjust for overruns.”

Gammon Construction risk and opportunities manager Eamonn Patrick Marley agrees that overrun issues can occur in bid situations.

“As approval processes lengthen and infrastructure projects become increasingly complex and unique, this increases the programme duration, which is not always reflected at the initial planning/design,” he says.

According to Peter Jackson, director, Asia region for Lockton brokers, the survey results illustrate that effective risk management can anticipate where issues are most likely to arise.

“Important parallel skills are effective project management to co-ordinate
work streams and also effective contractor management. This includes aligning major contractor risk management with the overall project management approach.”

He adds: “Too often major projects can descend into acrimonious legal disputes because client and contractor interests aren’t aligned, resulting in finger-pointing rather than collaboration to get issues fixed.”