In the next three to five years a wealth of infrastructure activity is planned in Aotearoa New Zealand with approximately $64 billion worth of projects in the pipeline. Te Waihanga, New Zealand Infrastructure Commission, has recently outlined a 30-year infrastructure strategy with the pipeline anticipated to grow by $140 billion by 2052. PwC reports on key ways to minimise risk in your infrastructure project.
The kinds of multidisciplinary large projects planned are often technically complex and frequently require collaboration and partnership between central government, local government, and mana whenua in order to unlock their full potential. At the same time, projects are expected to deliver on broader cultural, environmental, social and economic outcomes. By their very nature, these infrastructure projects involve a significant level of risk, with potentially major consequences - financially, environmentally and reputationally. A complex stakeholder environment, political pressure and heightened public scrutiny can compound the risk and compromise decision-making processes.
This article identifies five key elements of risk management to keep infrastructure projects on track.
Figure 1. Te Waihanga New Zealand Infrastructure Commission 10 year pipeline for projects over $100m+
Establishing good governance and leadership
It all starts with good governance. Regardless of the size and complexity of the project, a robust and transparent governance framework is essential. This framework should document, among other things:
- Roles and responsibilities
- Limits of authority
- Decision-making processes
- Underlying investment decisions
- Change management procedures
- Risk allocation
- Baseline financial envelope and programme
Each project should have a bespoke governance plan appropriate for the circumstances. A governance plan needs to be developed in collaboration with all partners and stakeholders, endorsed at the highest level, and implemented at the commencement of the project. Most importantly, there should be no situation where the governance plan is set aside, particularly in projects subject to a high level of political and media attention that are consequently at risk of uninformed influence. This is best countered by a sound governance structure which is broadly understood and rigorously adhered to.
Establishing a strong team of experienced professionals to lead projects is fundamental and current competition for the best resources is high. The development of a strong, coherent, diverse and inclusive culture is important in attracting the best quality resources available. Projects that are led by an experienced, dedicated infrastructure professional are more likely to succeed. This person needs to provide a strong foundation for collaboration with all stakeholders, including subject matter experts, to draw on all relevant input while minimising the risk of miscommunication among the project team. It pays to spend time up front developing a consistent understanding of what good collaboration looks like and expectations of the various parties to deliver this. Well-led teams are happier, and happier team members tend to stay in their roles for longer, providing greater continuity which in turn, assists in decision-making and project understanding.
Being realistic about timeframes
The first and perhaps most fundamental document to be produced for any large infrastructure project is the programme of work. This schedule of activities describes the sequence in which actions will take place, allowing resources and costs to be planned with accuracy.
One of the main reasons for a blowout in project timeframes is because the time allowed for the build element has been compressed. Key dates agreed at the planning phase need to be recognised as individual elements. When there is a delay in the design, planning and approvals phase (as there almost always is) do not assume that this time can be recovered through a corresponding reduction of time in the construction phase. Although it is common to hear terms like ‘acceleration’, ‘double shift’ and ‘ramp up’, it is rarely possible to complete the construction phase more quickly than initially planned. This is increasingly true in our current labour and materials constrained market. Trying to make up time by drafting a tender that imposes unrealistic deadlines on construction means that any attempt to speed up the build element is almost certain to result in the project going over budget.
Sharing the risk burden
Identifying and addressing risk should be a regular exercise, and one conducted across the whole team and at all stages of the project. Establish a comprehensive risk register from the beginning and revise it regularly to ensure decisions factor in all relevant information.
In addition to creating a risk register, there are a number of fundamental measures that can be implemented to minimise the risks of an infrastructure project. Using a standard form of contract (and, if possible, a full suite of contracts for all work packages across the project) streamlines contract management by making it easier to maintain alignment across all suppliers and identify any breaches. Non-standard or ‘bespoke’ contracts also attract a risk premium from most contractors.
Additionally, it is essential that risks sit with the party best able to manage that risk. However, if the party taking on the risk is not well placed to manage or mitigate it, then it becomes ineffective as a risk mitigation tool. Spending time at the planning and procurement stages to engage with the market and explore different models and risk appetite helps to better understand this and set the project up for success.
Properly costing risk and tracking cash flow
Costing project risks does not have to be complicated, but it doesn't have to be done properly. If there is uncertainty around actual cost some form of considered estimate should be allowed. If the costs are not properly understood this can lead to misinformation, sometimes making it look like the project has gone over budget when this is not in fact the case.
Pricing the risk register should be standard for contingency control and larger projects should consider a quantitative risk assessment as part of this exercise. Too often the contingency is expressed as a single number rather than as an allocated allowance. If the contingency is not apportioned as part of the risk allowance, the tendency is for clients to believe they have this money available to spend - particularly at the completion of the project where it can be a significant number. Pricing the risk and using the governance process to determine change will help minimise these cost blowouts.
When it comes to tracking cash flow over the lifespan of the project, regular monitoring is vital. Yet it is increasingly common to find that the fundamentals of expenditure are not part of a project’s monthly reporting. A simple s-curve graph plotting forecast expenditure vs actual expenditure will very quickly reveal whether a project is behind schedule or on track.
Providing clear and consistent communication
The final consideration in de-risking government infrastructure is maintaining the quality and consistency of project communications. A communication plan should be developed early on and maintained for the duration of the project to build momentum and interest around the project, as well as to ensure messages provided to the leadership, contractors, key stakeholders and the wider community are regular and unambiguous.
Good internal and external communication also informs the market from the development stage of the project, contributing to project awareness and interest, as well as building social licence for a project. In addition, good informal communication between the members of the broader team will lead to early identification and rectification of project issues as they arise.
There is an incredible opportunity to improve New Zealand’s infrastructure over the next 30 years and deliver on a range of broader outcomes to make Aotearoa and its diverse communities even better places to live, work and play. There are also clear opportunities to improve and manage this process in a way that helps deliver optimised outcomes, while ensuring projects are delivered on time and budget. Although positioned for large infrastructure projects, the above principles could be applied to infrastructure projects of any size and complexity.
Proper planning should never be overlooked as a key aspect of the infrastructure process.
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