Abstract

Organisations executing major capital projects often face significant problems in meeting set project objectives, leading to top managers being considered scape-goats and laid off. The paper discusses why and how this phenomenon takes place and remedial strategies for how to cope with this challenge are outlined.

Introduction

Capital projects are evaluated one by one. Uniqueness and uncertainties make it impossible to forecast exactly the result of working processes on single projects. In preparing corrective measures, priorities between quality, time and cost have to be made, often resulting in cost being the parameter to suffer.

Prevailing practices are to set budgets equal to expected costs at project sanction. The rational for this approach is to budget for what to expect, assuming variations between actual and budgeted costs level out over time. For organisations operating small portfolios of projects this practice may turn out to be disastrous.

Actual costs never equal budgeted on single projects. A substantial cost overrun on one project is all that is needed to attack and often to sack key decision makers in the operating company.

In the paper the authors present statistics covering 44 major capital projects executed since 1990 in a major oil company. The study concluded that actual costs equalled budgeted costs in average, though significant deviations on single projects led to major organisational changes and the replacement of the CEO and the chairman of the board.

The paper explores a new understanding of project specific uncertainties and offers a proactive communication strategy that will outwit attackers' attempts to escalate cost deviations. If implemented successfully project directors may once more proceed with the most profitable project strategy rather than wasting time and money on building no value adding preventive defence shields in order to protect the project execution process from dysfunctional forces in relevant project environments.

The paper first addresses what managers don't know about project uncertainties. Typically managers don't fully know the difference between cost engineering and accounting. Project uncertainties are considered evil and tried eliminated resulting in upside potentials remaining untapped. Perceived best practice tools are inadequate as managerial actions are considered random choices or even ignored.

Secondly, the paper discusses why projects tend to fail. Is a cost discrepancy a result of bad management or bad luck is asked. It is argued that how cost discrepancies are communicated is the key to understand whether the project really is badly managed or simply perceived to be. Unsuccessful projects are sometimes perceived as inadequately managed due to miscommunication. In some occasions observed by the authors miscommunication of budget overruns lead to the fall of top management of a major oil company.

Finally, the paper addresses how project uncertainties are communicated. Communication strategies that the authors consider superior to current practices are outlined.

What managers don't know about project uncertainties?

In this section we touch a number of issues related to single project uncertainties that according to observations made by the authors are not generally understood by managers;

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