Costing the nation dearly

MANAGEMENT & GOVERNANCE

S. Ainavolu

11/30/2021 8 min read

Costing the nation dearly – Complexities of large projects and possible overruns

Large projects require investments in terms of money and time. Measuring the project effort in man-month metric has limitations and below a certain limit time can’t be compressed. In other words, the gestation period, the efficient and the minimum required time for any project can’t be squeezed below the permissible limit. It shall be almost impossible to complete any project with chosen mode of execution below certain time needs to be the understanding and one should respect it. Run for the quick money should not compromise and result in higher overall costs. Similarly, costing of any effort too has limitations and below the certain limit if one tries to push it further down, there may be ramifications in terms of quality. Thus, to arrive at the best overall cost of ownership over the life cycle of the project, one needs to invest the basic resources and allow the project completion to have its genuine incubation to commissioning time requirement.

Having agreed to the above converging logic one arrives at the “Total Cost of Ownership” (TCO) framework, the entire spend over the life cycle of the project. In other words, from concept stage to the commercial to the closing down of the project at its end of life span, what goes into accounts for TCO. This includes project preparedness, construction costs, maintenance costs needed for having it at the agreed levels of satisfaction and delivery level. For TCO to be optimum, one needs to be considerate during different stages of the project and not compromise on basics. This includes among others, where it is located, what goes into the project, who executes and how it is being handled at different stages. Each can prove to be vital.

Deliberating on the where/what/who and how of the projects as highlighted above, each of these dimensions may have huge bearing on the TCO. Where the project is located may have some latitude in a few cases and zero freedom of choice in other cases. For instance, if we need to construct a school in a particular village, it has to be in the village itself. We can’t have any choice. On the other hand, one decides to construct a bridge across the flowing river, probably one may decide the exact spot where the bridge needs to come based on the width & intensity of the river. It can be few kilometres upstream or downstream so that soil strength and width of river are considered and factored in for the cost and effort optimization. Often, the local constituency/district pressures and need for satisficing shall dominate the optimization intent and at the best one has to choose better among the sub-optimal alternatives presented. Seeing the big picture and stakeholder management may be the phrases given in Management classes but it hurts rational interests. Example can be locating an imported petroleum fed refinery project in the hinterland and that too when consumption centres are not around. The reason might be to satisfy the need of industrialization and signalling happening around the area. Another instance can be locating a thermal power project at the city of political importance and fetching the coal inefficiently from over hundreds of kilometres, again to satisfy the local sentiments. The consideration in these cases might be pure play politics.

What goes into the projects is not only of technical importance but also often aesthetics is involved. Often in the guise of the latter, “gold plating of the water cooler” situations happen. In other words, project cost is made to escalate and this might be done with an intention which is not of quality or technical interest driven. The design consultancy and execution agencies tend to get a portion of the project cost as their “effort dues”. Additionally, in case of public ownership projects the approving and paying authorities have an interest in escalating the project cost, as their private incentives are tied to this amount. Higher the project cost, better for the individuals’ private benefits. Thus, though it may not be in the interest of the nation or the public (the tax payers), the escalation happens, and often surreptitiously through re-designs or extension of the original scheme or by modifying scope of the work. Malafide intention one may caution in Ethics classes but the ground reality offers many quotable case studies.

Who designs, executes and maintains the projects is also of significant importance. Extensively defining the “specifications” and ensuring that all the interested vendors agree to these and choosing the lowest cost quoting one is traditional “L1” based approach. The market price discovery takes the push to such a level that the viability won’t be there for the vendor who qualified based on the lowest bid criterion. Then comes the “cutting the corners” and compromising on the quantity and quality of the works executed. This also injects incentivizing the approving of the sub-standard work and compromising on the overall. A road project that is compromised along these lines shall result in poorer travel experience, quickly surfacing ditches, probably may cause more accidents, may demand extensive repairs within a short time and overall push up the logistics costs for the nation. Confirms “penny saved” proverbial mindset.

How is another important dimension of large projects as multiple methods may be available. For instance, in-situ (all at the site of the work) may look attractive given low levels of uncertainties and probably lower cost of execution (ground up using local, low-cost labour). However, this might result in inordinately longer times to complete. Also, this might result in huge inconvenience to the neighbourhood if there are people living in the surroundings. A quick example to appreciate is the typical metro train projects’ construction. Barricading for almost a generation’s life time was the scene when first metro came up. Slowed down traffic, jams that test your patience and also the life that gets wasted due to above for possible, future benefits have to be considered. So also, the huge environmental cost in terms of locally disturbing Suspended Particulate Matter (SPM) appearance and increased vehicular exhaust toxicity (due to chokes and jams of traffic) have to be factored in. Thus, one has to take holistic calls around better ways and means of completing the projects within a shortest possible timeframe, and keeping the above “non-direct-cost” parameters in mind. Probably, better alternative means of approaching may be the choice then, with assembly of semi-finished structural elements happening over shortest possible time at the “location”. This minimizes the inconvenience to the local “stakeholders”.

In spite of above where/what/who and how of the projects are taken care of, there shall be surprises that get sprung up and make the costs shoot up due to other factors. Over the construction period itself, the “Where” may prove to be the absolutely mis-informed or mis-considered choice. Locating a heavy structural weight project on a soft, coast line soil probably to save money on the conveyor operations costs (which link project to the nearby port) may involve huge piling/ foundation costs. Other semi-informational choices may result in huge geological surprises that may push up the overall costs by adding the newly found risk related mitigating costs. So “Where” may prove to be costly and hence one has to be objective. Similarly, any compromise on “What” goes into the project again may push up the maintenance costs and hence overall costs become high, loading the customers for generations over the entire life of the project.

Similarly, “Who” executes makes a huge difference. Sometimes, the agency that is not adequately qualified because of their inexperience may even abandon the project in the middle. This may delay that project and if that is a part of the larger project, then the overall project gets delayed. An example was an agency given work to complete the river centred pumphouse abandoned the project mid-way. Due to this, the water requirement was not met for the main project and overall projects’ operations could not be started as planned. The cost of the pumphouse sub-project was only a fraction of a percentage of the overall cost of the project. Here, we see that 1% component of the project delayed the other 99%. This affected the cash in-flow and affected the financial plans for the next phase. Additional element involved here was any riverbed-based construction activity can happen only during the months of lean flow viz. summer. If one misses the period say between February to May, the construction has to wait for the next 5-6 months. Construction of the pumphouse can’t happen without diversion and diversion efforts can’t happen without cofferdam which creates the front for actual construction. Again, small intended saving by going with less quoted contractor caused huge downstream losses.

There could be calculation and estimation mistakes that shall prove to be the blunders over execution. In the Indian context there is an example of a large project that got delayed due to an important component could not reach the site in time. It is an interesting use case to discuss the importance of logistics. The long component that was imported was to reach Mumbai port and subsequent to “clearances” was to be loaded on a long trailer which shall haul it to project location in Central India. On the way there was a river that was to be navigated and the bridge on the river could not support the load was the estimate. Strengthening the bridge was also out of question. So, using the temporary causeway, the haulage was to cross during the peak summer when the river depth was minimum. The component was to get fitted on JIT basis and the commissioning shall happen before monsoon was the plan. All calculations went wrong when the component reached Mumbai six weeks late and when the hauling trailer reached the river, it was already overflowing so causeway crossing plan had to be abandoned. Trailer had wait till the river gave respite and then made a careful crossing to reach project location. This caused months of delay. Opportunity cost, lost revenue for almost half a year!

In spite of the best efforts in terms of project planning, choices, and execution too, there could be surprises. These to be managerially condoned as beyond measure. However, in such cases one may need to come up with quick Plan-B for that part of the work that is affected by some rare occurrence. From the beginning of the project, one has to sensitize the entire team about the big picture, impact of the delays, and showcase the overall impact of any delay in terms of monetized “cost of one day delay”. The slack available at any stage need to be made best use of. Concurrent processing to be made use of in the interest of time but with cost optimization. Proper metrics need to be developed for tracking and fixing responsibilities. Dashboards if made visible at important locations of the project and offices shall motivate the teams to put in their best foot forward. Empowering the teams for quick site-based decisions, devolution of financial powers, quicker decision making in cases that need central office support shall greatly help.

As we are aware most of the large projects depend on the borrowed funds that have a burden associated with, the interest. Interest during construction (IDC) gets capitalized and in turn becomes a burden for the end-users who have to pay when they benefit from the product or service from the project. The strict limit on the extent of IDC that gets the benefit of capitalization shall help define limits on the tolerance of delays. Delays not only affect the ultimate owners but also different stakeholders, including both direct and indirect. Society suffers with slower conversion and extension of the benefit getting delayed, though resources got committed. Executing agencies may see chipping away in their estimated margins with time delays, and may lose interest in resolving the “punch points” highlighted by the owner.

Lenders perpetually wait for the timely servicing of their commitment to the companies and the sector. The wait becomes anxious due to the Damocles sword of NPA classification. Overall the nation suffers due to less returns for the capital and efforts committed. There shall be huge opportunities lost downstream too. Hence, is the need for obviating the time and cost overruns. We may begin by having a centralized “National Projects Monitoring Authority”, with the prowess to facilitate required interventions. Then, truly good times shall begin for all the stakeholders.