Viewpoint: Road to reform

In today’s current environment there is an increasing need for highways engineers to demonstrate value for money and better returns from expenditure. Are we able to meet this challenge?

Cost overruns for transport capital schemes have been a constant for over 40 years.

• Nine out of 10 transport infrastructure projects studied have cost more than the original estimate or have exceeded the original programme.
• One study of 258 schemes revealed an average cost overrun of more than 30%.
• Alarmingly the magnitude of the differences between estimate and outturn is approximately the same as it was 40 years ago, despite the advent of computing and more sophisticated techniques.

The primary reason for overruns is a lack of realism in cost estimates and delivery programmes. The cost of delay is under estimated, contingencies are set too low, “scope creep” is allowed to develop beyond the original specification and there is a failure to factor in the cost of technology risk.

The industry has been making strides to become more efficient since 1994 yet as recently as 2007 the Nichols Review reported that estimated costs for the Highways Agency’s roads programme moved forward by over 18% in one year.

“The primary reason for overruns is a lack of realism in cost estimates and delivery programmes.”

This suggests that the way clients and project sponsors engineer the commercial outcome is just as important as engineering the technical solution, not least to demonstrate to politicians and the wider public that value for money is being achieved.

In its Managed Motorways procurement, the Highways Agency is actively demonstrating how it is meeting the challenge. The “usual suspects” are now considered more diligently than before - the right procurement route (ECI target cost being set by the client), the appropriate management of risk, the benchmarking of estimates, challenging engineering orthodoxies, and truly attempting to share value and success with the supply chain.

One simple improvement around the treatment of risk worth highlighting is single versus three-point estimating. Historically “single point” estimates are used but these can be misleading as they do not consider the full range of uncertainty. The adoption of a three-point estimate is an assessment of the range of possible outturns from a minimum to a maximum; with the most likely outturn located between the two extremes. It is a methodology for describing the valuation of risk and the limits of variability of uncertainty and drives a deeper and more realistic understanding at the start of a project.

Commercial realism

The implementation of effective risk management techniques by contractors and consultants at pre-construction is still rare, and is arguably still focused on the production of a risk register without the ongoing proactive management of the risks contained within it.

Three-point estimating, and similar diligence around other cost components, allows target cost challenges to be devised which set a new tone of commercial realism. This approach demands the appropriate behavioural and commercial responses from the supply chain.

In the current procurement environment, success will be achieved by all players adopting the right behaviours and a pragmatic approach to risk and opportunity management at programme and project level.

By clients and suppliers adopting a robust commercial engineering approach we will see greater value for money and certainty of outcome from highways investment.

• Brian Fitzpatrick is a partner and head of highways at EC Harris

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