Understanding and Monitoringthe Cost-Determining Factors

of Infrastructure Projects

A User's Guide

Table of contents

1. Introduction 3

2. Understanding The Project Development Process 4

3. Initial Project Costs and Cost Varying Factors 93.1 Key Determinants of Initial Project Costs 93.2 Factors Which Change Costs over Time 113.3 Typical Analysis of Project Costs 14

4. Methods of Controlling Costs 174.1 Uncertainty in Project Costings 174.2 Risk and Contingency Planning 174.3 Project Management 18

5. An Approach to Cost Appraisal and Monitoring 195.1 Project Interrogation 195.2 Conclusion: Use of this Guide 21

Glossary 22

Appendix: Poor and Good Practice Case Studies 23

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1. Intr oduction

As is the case with all of the major spendingDirectorates of the European Commission, DG XVI hasan ongoing commitment to achieving value for money inthe projects and programmes which it supports. TheDirectorate has at its disposal a number of mechanismswhich it can use to achieve this objective including:

• cost benefit analysis, which is a prerequisite for allinfrastructure projects with a value of ECU 25million or more;

• interim and ex-post evaluations of programmes.

This Guide is designed to further strengthen DG XVI’sappraisal capabilities by addressing a particular problemthat is encountered with large infrastructure projects:that of cost and time over-runs. It is a fact that very fewof the major projects procured with the support of ERDFgrant, whether under regional policy programmesgenerally, or through the Cohesion Fund, are completedwithin the project sponsors’originally estimated budgetand time frame.

Even relatively small cost over-runs can causedisruption when a project is part of a wider programmeof expenditure. In extreme cases, where final costs haveturned out to be several times higher than originallyestimated, the situation is unsustainable. Moreover, italso faces the Commission’s desk officers with theproblem of assessing the validity of additional financialclaims.

One method of assisting desk officers that wasconsidered, but then rejected, would be to compile a setof standard or unit costs for different types ofinfrastructure. This approach would involve acomprehensive review of actual project out-turn costsfor a range of project types. This would need to be donefor each Member State or even region of the EU. Therationale behind a standard costs approach is that itwould provide a benchmark against which desk officerscould assess both new and revised project costestimates.

The main reason for rejecting this approach is that itdoes not allow for the extreme diversity of conditionsunder which projects are implemented in practice,including location, topography, institutional differencesand many others. It was decided that the project andprogramme monitoring role of the desk officers wouldbe better served by improved understanding of the

overall project development process, than by a set ofsimplistic “look up” tables.

The purpose of this Guide is therefore to provide deskofficers with a basic understanding of the process bywhich project cost estimates are made so that they willbe better able to review, with the project sponsors, thereasons for actual or anticipated cost and time over-runs.Although it is not a project management manual it doesdeal with some of the issues that are involved in theimplementation of major infrastructure projects withinclear cost and time constraints.

The Guide is designed for use by officers of varyinglevels of experience in programme and projectmonitoring. It also recognises that infrastructureprojects encompass a wide variety of works undertakenin the transport, water, energy and buildings sectors. Bytheir nature, these can be complex undertakingsinvolving a wide range of organisations, both nationaland international, as well as national agencies andprivate sector construction companies.

The Guide recognises the principle of subsidiarity, thelimited resources available to undertake projectappraisals and monitoring, and Member States’requirement to commit large sums of ERDF grant inannual cycles. These factors limit the degree to whichdetailed and time-intensive project cost appraisals cantake place. The objective of the Guide is, therefore, tofacilitate more effective appraisals within the limitedtime available.

The Guide is divided into four main sections.

The first section – Understanding the ProjectDevelopment Process – simply explains the stages inthe project development cycle, and the roles of the keyplayers in the construction process.

The second section – Initial Project Costs and CostVarying Factors – explains the main elements in theinitial cost estimate for a project as well as reviewingsome of the many factors which lead to changes to theoriginal estimate.

The third section – Methods of Controlling Costs–discusses the way in which cost and time control ofinfrastructure projects can be improved by riskmanagement and more realistic estimation ofcontingency budgets.

The final section – An Approach to Cost Appraisal andMonitoring – provides a step-by-step guide toimproved monitoring of the costs of infrastructureprojects.

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2. Understandingthe ProjectDevelopmentProcessIn this Guide an infrastructure project will refer to thedevelopment or improvement of land transportsystems, public buildings, energy networks, and watersupply and treatment works. The basic aim of aninfrastructure project is to implement an economicallybeneficial improvement whose objectives aredetermined in terms of technical performance, budgetand timescale.

The development of infrastructure projects is acomplex and resource-intensive process. It is possible,however, to analyse all projects in terms of a commonlife-cycle which comprises a series of stages. Thesestages are illustrated in Diagram 1 and briefexplanations of each stage follows. Although the stagesare illustrated in a hierarchical form, some of the stagescan be undertaken simultaneously.

Project Specification and Feasibility

The first stage of the project cycle is the definition ofwhat the requirement is and how it can be satisfied.This includes deciding on the size and quality offacility that is required. Different options will bediscussed at this stage and evaluated in terms of broadcost estimates, expected operational performance andeconomic benefit. Preliminary cost estimates may beattempted at this stage.

Cost benefit analysis, whether formal or informal, willfollow initial specification of a project. The purpose isto test whether the project as specified will beeconomically viable or whether it will generate goodvalue for money. Leaving such feasibility studies untilafter a project has started, (which often happens inpractice!), may mean that potential problems are notrevealed in time to influence project planning.

Although the economic and financial evaluation of theproject is probably the most obvious element of thefeasibility stage, external factors can play a major rolein determining whether a project will proceed. Theproject’s political context, its relationship with thelocal community, the general economic environment,its location and the physical conditions in which it will

be built, are the most important external factors.

Outline Design

Work will then be undertaken to develop the plans forthe project. These plans will establish the generalparameters of a scheme design and will include all theproject’s major components. The function of outlinedesigns is to provide:

• the basis for the detailed design and accurate costestimates of the scheme;

• the necessary information for the planning and landacquisition process.

Finance

The financing of a project involves the arrangement ofadequate funds to pay for the development andoperation of a clearly defined project. In some cases itis also necessary to raise finance to cover maintenanceand operation.

For most projects, the main elements of finance will be:

• development finance – to pay for the feasibilityand initial design stages;

• construction finance – to pay the capitalexpenditure;

• contingency finance – to allow for cost overrunsand delays.

The structure and form of finance will be influenced bythe nature of the project. For some projects, themajority of funding will come from local or centralgovernment sources; in other cases the project will berevenue-generating and this revenue will be used to payback loans and pay for maintenance and operation.Some projects may also involve a private sectorcontribution in which the private sector aims to ownand control some or all of the assets.

The structure and timing of financial provision mayimpose certain constraints on the design and schedulingof the project. For some projects which apply for ERDFfunding for example, very little detailed design workwill have been undertaken prior to the award of grant.This may be simply because all the funding for theproject is not yet in place and/or the risk is too great tocommit even the design costs of a project that may notreceive a grant.

In other cases, grant may not be required for thesponsor to commence a project and the design and even

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Diagram 1

Project Specification &Feasibility

Outline Design

Pro

cure

men

t o

f C

ont

ract

or

Fina

nceConsents &

Land Acquisition

Detailed Design

Construction

Handover

The Project Development Cycle

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the construction may be started before a grant isrequested. Cases of retrospective grant request alsooccur, where a project may be almost complete beforegrant is sought.

Consents and Site Acquisition

Before construction work can start, the necessaryconsents and authorisations must be in place. The timetaken to obtain these is probably the mostunpredictable element of a large infrastructure projectand can have a significant effect on the timetable andcosts. In addition to institutional approval, consentsmay also need to be obtained for health and safety,water, sewerage, waste disposal, fire certification, gas,electricity and highways rights.

Public consultation is a major element of the consentsprocess in most Member States. Inadequate allowancefor required consultation may lead to unforeseendelays in project implementation. Envir onmentalImpact Assessmentis now required for most largeprojects before consent is achieved. This also may takemore time than anticipated.

A project cannot proceed if the project sponsor doesnot own or have development rights for the land.With projects implemented by local governmentauthorities, the compulsory purchase of land can beundertaken. The existing owners have to becompensated for the purchase and they can usuallyappeal against the sum offered. Appeals can be verytime consuming, although in some circumstancesprojects may proceed whilst the appeals are beingheard.

Detailed Design

The detailed design of a project is used to assess thequantities of materials required and the actualconstruction work involved in implementing a project.Drawings and lists of quantities are then used toproduce detailed project costs and to establish animplementation timetable.

Procurement of Contractors

Project procurement involves selecting a contractor toundertake the construction of the project. Theconventional approach to procurement of public sectorprojects involves advertising for firms to tender for thework. These invitations may be open to all companiesor restricted to a shortlist of preferred bidders. Allinvitations for major projects in the public sectorshould be advertised in the Official Journal of the

European Communitiesin accordance with the PublicProcurement Directive.

A contractor will submit a tender which sets out theskills and experience of the company in undertakingthe particular type of project, their proposed approachto the construction task, and their estimate of the costof undertaking the work.

Many projects nowadays involve the procurement ofcontractors on a “design and build” basis where thecontractor submits a design and tender on the basis of agiven specification. Some projects may also involve thecontractor providing all or part of the finance forbuilding the project and for operating it aftercompletion. Various terms are used to describe thesecontracts; the most common being Design, Build,Finance and Operate (DBFO).

The Construction Contract

This involves the actual construction of the project.Contractors can be legally bound to undertake the workunder a number of different contractual arrangements.Before a contract is agreed, a decision must be takenabout the basis upon which the contractor will be paid.The factors which may affect the decision on paymentmethod will include:

• the degree to which design information is availablewhen contract documents are prepared;

• the institutional rules of the public sector fundingparties (including the Commission);

• the nature and size of the project;

• the general economic context;

• the time period available to produce tenderdocumentation; and

• the time available to undertake the work.

The following are some different methods of actuallypaying the contractor for the construction work:

• fixed lump sum, with payment usually oncompletion;

• target lump sum (as above but with moreflexibility);

• progressive payment according to tasks completed,(based on agreed rates for specified tasks orquantities of materials used);

• progressive payment according to human resourcesexpended, (based on an agreed schedule ofhourly/daily rates).

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If the project’s scope and specification has been veryclearly defined, or a standard type of project is to beconstructed, then the fixed lump sum may be used. Therisk is passed fully onto the contractor and the projectsponsor cannot usually intervene further in the project.

With the target lump sum approach, the contractorprepares an estimate based on a defined scope of work.Before the project sponsor accepts this sum, there willbe an agreement on the respective liabilities of theproject sponsors and contractor, if the contract over-runs on costs.

The “tasks completed” or “materials quantities”approach involves measuring construction worksaccording to agreed methods. When the works arepriced, their totals plus an element for profit andoverheads, forms the contract price. This approach isflexible, can deal with change effectively and is used invaluing the work undertaken during the constructionphase. If the estimate of quantities and contract valueare to be realistic, the detailed design of the projectmust have been completed prior to commencement ofconstruction.

If the activities to be undertaken are known but neitherthe detailed design information nor the scope of theactivities are, then a schedule of rates may be used. Thecontractor is paid, therefore, on the basis of unit ratesthat have been included in the tender. Usually, thismethod yields a higher project cost than thetasks/quantities approach because a higher contingencyamount will need to be included to allow for the greateruncertainty involved.

Project Handover

A date for the handover of a project from the contractorto the project sponsor is usually included as an elementof the contract. For many reasons this may vary fromwhat was originally agreed in the contract. Typicalreasons for such extensions are discussed later in thisGuide. Many projects include financial penalties (orrewards) for late (early) completion of a project. Apercentage of the total project costs may also beretained until the project sponsor is satisfied that theproject has been completed as specified.

The Key Players

The key players in the infrastructure developmentprocess will vary depending on the institutionalstructures in the different Member States. Thefollowing roles are typically the most important:

• The Project Sponsor/Programme Manager

• Project Manager

• Consents Managers

• Architect

• Costing/Quantity Surveyor

• Engineer

• Contractor.

The Project Sponsor. The project sponsor may be anindividual, a private company or a public authority.The project sponsor (or programme manager in somecases), has ultimate responsibility for defining thecharacteristics of the project that is being procured. Itis very important for desk officers to know exactly whothe project sponsor is. If this cannot be clearlyestablished, the risk of cost over-runs and even projectfailure will be high. It is important also to understandwhether the project sponsor has any constructionexpertise or has staff who can work closely with theother members of the project team. If an inexperiencedproject sponsor has major responsibility for costing,this may lead to poor project cost estimates. It isimportant from an evaluation point of view tounderstand exactly what role the project sponsor has inproject development.

The Project Manager. The project manager isresponsible to a project sponsor for the overallplanning, control and coordination of a project and forensuring that a project is completed within time, onbudget and that it satisfies the project sponsor’sspecifications. The project manager may also beresponsible for assembling the project team, assessingthe project’s viability and securing the funds toimplement the project. The project manager’s role willvary from project to project. It depends on the degreeto which the project sponsor wants to be involved asopposed to delegating the responsibility to the projectmanager.

Good project managers should be aware of all factorsthat can threaten the successful implementation of theproject. They will ensure that adequate performancereporting is carried out at all stages. This ensures thatproblems can be identified quickly and measures takento mitigate them.

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Consents Manager. The consents managers includethe local authority officials responsible foradministering town or regional planning mechanisms,as well as other government agency officials withresponsibility for licensing, safety aspects, environ-mental management etc. They have responsibility forensuring that the project can legally be implemented ina particular location. At times they may also beinvolved in undertaking some of the feasibility workfor a project and be responsible for assessing thepotential environmental and economic impacts of theproject.

The Ar chitect. The architect is responsible fordesigning buildings, public spaces and landscapes. Insome Member States the architect also undertakescertain consents duties. The architect may also act asthe project manager.

The Costing/Quantity Surveyor. The costing orquantity surveyor, (the abbreviation “QS” is known insome Member States), is the person/s responsible forcalculating the costs of a project, preparing tenderdocumentation and also monitoring the value of thework undertaken during the construction phase. The“QS” (or equivalent) may also be responsible formonitoring the project’s cash flow. The QS is usuallyappointed at the beginning of any construction projectto advise on costs and alternative forms and methods ofconstruction which may be more cost effective. If aproject sponsor wants a change in the project’s designor specification during construction, the QS will costthese changes and assist in the decision-making onwhether to agree the changes.

The Engineer. Engineers are the main professionalsinvolved in the technical design of projects. There aremany different types of engineer but the mostcommonly used are civil/structural, and mechanicaland electrical. Their responsibilities vary betweenMember States. Civil and structural engineers haveexpertise in the following types of works: roads,railways, bridges, ports, dams, buildings. Mechanicaland electrical engineers are concerned with the designand integration of machinery and electrical systemswithin infrastructure projects.

Engineers may be hired separately by a project sponsoras design consultants. Alternatively, they may workwith a contractor in both design and construction roles.

The Contractor. The contractor is responsible forimplementing – actually building – the project. Withsome forms of contract, however, the contractor can

also be responsible for designing the project as well.The contractor may be a single company but in somelarger projects, two or more contractors may worktogether in a consortium. Most contractors usuallyemploy smaller sub-contractors to undertake discreteand specialised work.

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3. Initial Pr ojectCosts and CostVarying Factors

This section first focuses on the factors that determineinitial project costs and then examines some of themore important determinants of cost changes overtime.

3.1 Key determinants of initialproject costs

No two infrastructure projects will cost the sameamount of money no matter how similar they are. Apartfrom basic technical factors, the wide range ofeconomic and institutional conditions in differentMember States will itself always lead to variations.Nevertheless, the fundamental project costs are basedon the actual cost of the land, materials, equipment andlabour in the region where the project is beingprocured. These basic costs will vary depending upon anumber of factors which are discussed below.Diagram2 summarises these factors.

The Project Specification

The specification defines the physical attributes of aproject. With a road, for example, given levels offorecast traffic will lead to specification of the requiredlength, depth and width of the road pavement, thematerial to be used for surfacing, the number of lanes,bridges and junctions etc. For buildings, the requiredfunction and expected occupancy rate will lead to aspecification of total floorspace and floorplate size,height, internal and external appearance, floorloadings, heating and lighting requirements etc.

Generally, the more detailed the specification and thelarger the project, the more expensive it will be.

Location

Location affects project costing via institutional factorsand through geographical realities.

Institutional factors can affect initial project costestimates in a number of ways. Consents procedures inparticular may be more arduous in some countries,

affecting the time it will take to successfullyimplement a project. Allowance for the costs involvedin sustaining a long public consultation exercise is anexample. Where major projects are likely to bestrongly opposed on environmental grounds, more costmay have to be allowed for environmental mitigationmeasures.

In geographical terms, construction and material costs,land costs and design standards vary widely across theEU because of the varying distances from suppliers,climate and weather conditions, and general marketconditions. Even within a country, variations will existdepending on whether a project is being implementedin a peripheral or central area, or in an urban or ruralcontext.

Generally, the more remote a project is, the moreexpensive it will be because of the cost of transportingconstruction materials and equipment to the site. In anurban location, land costs are usually much higher.

Form of Procurement/Contract

As explained in Section 1, the form of procurement andcontract used by the project sponsor can alter theestimated cost of a project. Cost savings may be madeby means of lump sum contracts although these areusually marginal in relation to the total project costs.DBFO contracts, which seek to transfer most of therisk of cost over-run from project sponsor tocontractor, may in some circumstances yield savings.

Site Characteristics

A site can be affected by soil and drainage conditionsand access restrictions which can affect the originalcost estimates. The amount of excavation, piling andfoundation activities required are particularly affectedby poor ground conditions. Where there is uncertaintyabout ground conditions, accurate project costingcannot be achieved unless a soil survey is undertaken.This may require the sinking of boreholes to obtain soilsamples at different levels beneath the surface.

New Build or Improvements

Generally, the construction of new infrastructure ismore expensive than improvements to existinginfrastructure, or the refurbishment of buildings. Thisis primarily because the “non-building” costs such asland purchase, foundations, services provision etc. donot have to be included when simply upgradingexisting structures.

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Tax Liabilities

An organisation will be liable to pay tax on itspurchases. Some organisations and types of project arenot liable to pay taxes, or else these can be reclaimed.Local government projects and infrastructure for publicuse are examples. Some public or quasi-public sectorcompanies, voluntary and private sector organisationscan be liable and these tax costs can have a significantimpact on gross construction costs.

Timescale

Generally, the longer a project takes, the greater theproject costs will be. Project timescales are dependenton the specification of a project. Usually, the larger aproject is the longer it will take to implement. This isnot always the case; if substantial additional resourcesare used, project implementation can often beaccelerated.

In some cases, work on a project may take a lot longerthan expected because its phasing is dependent upon

other, linking projects or public finance programmes. Aproject which involves non-continuous phases isusually more expensive than one undertaken withoutinterruption because of the additional costs involved inre-mobilising plant and contractors.

Inflation

The longer the expected construction period, the moreaccount will need to be taken of expected inflationaryprice increases over time. This is particularly importantwhere a public authority’s expenditure programme isinvolved. Initial cost estimates will need to allow forthe value that will need to be paid at the time theproject actually goes ahead.

Levels of inflation vary amongst Member States andcan be as low as 1-2% or as high as 10% per annum. Insome of the states that will accede to the EU in future,higher inflation rates may be more typical.

Diagram 2

OriginalCost

Estimate

Specification

TimescaleSite

InflationForm of

ProcurementContract

Tax LiabilitiesLocation

New Build orRefurbish-

ment

Key Determinants of Costs

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3.2 Factors which change costs over time

Once implementation begins, a project’s costs rarelyremain static. As further information becomesavailable the costs may be further defined. Yet, evenwhen a cost has become firmly fixed, there arenumerous factors that can lead to the cost increasing.Delays are a major factor. Whatever the reason, delaysalmost invariably increase budget costs. Many eventsmay have contributed to the delay – some which couldhave been foreseen and others which could not.

In the context of EU programme funding, time and costover-runs have obvious implications for the number ofprojects that can be funded within a programme period,and for the scale of the outputs and impacts generated.Research carried out in the preparation of this manualhas found that many ERDF projects experience a rangeof problems in both the pre-construction andimplementation stages. These lead to projects over-running either in time or costs. As indicated above,delays generally translate into higher project costs.

A key consideration in the context of EU funding is thetime at which an application for funding is actuallymade. Applications can be made at three main points intime:

• very early in the construction cycle when broadcost estimates only are available;

• on the basis of tender prices for the work to beundertaken;

• retrospective bids where the project has beencompleted but grant is still required.

The level of certainty about the final or outturn costswill vary for each of these three situations. Obviously,if an application comes forward very early in theproject development cycle, then there is a much greaterchance that the project will experience time and costover-runs.

Diagram 3 illustrates some of the factors that result inprojects being delayed or costing more than originallyplanned. The Appendix to this Guide also includes casestudies which illustrate how some of these factors haveaffected actual projects.

Poor Project Management

The role of the project manager or project managementteam is probably the most important element incontaining the costs of a project. It is often true that apoor project with a good project manager will becompleted satisfactorily. But even a good project, ifcombined with poor project management, will almostalways face serious difficulties.

A poor project management structure will have animpact at all stages of the construction process leadingto:

• a lack of planning and coordination;

• poor communication between members of theproject team and the project sponsor;

• failure to identify problems and institute necessarydesign and programming changes;

• a lack of control over time and cost inputs.

Design Changes

A change in a project’s design can arise for a number ofreasons. It may be that the project sponsor wantsadditional elements to be included in the project orchanges to existing ones. Usually, these design changesrequire additional time inputs from architects andengineers as well as the additional time and cost inputsfrom the contractor and for additional materials.

Unexpected Ground Conditions

Ground conditions can be assessed by a desk-basedreview of relevant published documentation andthrough the use of trial pits and borehole sampling on-site. However, the actual site conditions for the fullextent of a project are not usually determined untilconstruction begins. It is possible that difficultconditions are overlooked by the initial review or thatconditions have changed due to adverse weatherconditions or changes in sub-soil conditions.Unexpected sub-surface conditions can, at times,require fundamental redesign of projects at greatexpense. Changes in surface ground conditions canlead to problems in actually moving machinery andsupplies around the site, and in undertakingexcavations and laying foundations. This can alsoincrease costs and add to the construction timerequired.

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Inflation

As noted earlier in this section inflation can act toincrease the original estimates of construction costs.Inflation may have been taken into account in theoriginal estimates, but if the rate of inflation increasesabove the predicted level during the constructionperiod, then the original cost estimate will be exceeded.Obviously any other factor that delays a project willexpose the project to the risk of further inflationarycost increases.

Inflation may not be the only cause of price rises.Political or technological factors may affect one ormore element of costs; for example, increased labourmobility between Eastern Europe and the EU, (whichmay occur after the accession of the Eastern states),could in future lower the labour cost element ofconstruction projects.

Shortages of Material and Plant

During periods where the level of development activityis unusually high in a particular region, there may be

Diagram 3

Project Delayor Variation inOriginal Cost

Estimate

Poor ProjectManagement

Force Majeure

Inflation/Relative Price

Changes

ExchangeRate

FundingProblems

LandAcquisition

Costs

UnexpectedGround

Conditions

DesignChanges

InappropriateContrators

Shortages ofMaterial and

Plant

Cost Changing Factors

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shortages of some construction materials, constructionplant (machines and equipment used duringconstruction) and service plant (equipment used in theoperation of the infrastructure project). If this was notanticipated in the original cost estimate, delays mayoccur and/or the prices of these elements increase.

Exchange Rates

The exchange rate is particularly relevant if contractingservices or other elements of the project are beingpurchased from other Member States or from outsidethe EU. If exchange rates change beyond the levelpredicted by the project sponsor (and the companiesproviding the services) then the cost of the project canincrease. It can of course operate in the opposite waywhere the project sponsor takes advantage of astrengthening of his own currency. Of course the EU’sExchange Rate Mechanism and the Single EuropeanCurrency project are designed to minimise and,eventually, eliminate such problems.

Inappropriate Contractors

Contractors are selected on the basis of price,experience in undertaking particular types of projectand their track record in producing high quality workwithin budget and on time. Problems may arise wherethere is a high level of development activity beingundertaken in a particular region and the bettercontractors are not available to bid for the work at thattime. Alternatively, the tender review process may nothave been undertaken by the personnel with the bestunderstanding of the services required. As aconsequence, firms which are not the most experiencedin that field of activity are chosen, often withimplications for the quality and cost of a project.

Delays in project implementation and increases incosts can arise through the use of ineffective orinappropriate labour, or errors in calculating howproductive the labour will be. This can happenespecially when sub-contractors are used whose qualityis not controlled in the main project contract.

In most cases there is a trade-off between price,experience and track record but the desire to accept thelowest tender does not always lead to a project that iscompleted within time and budget.

There are cases of contractors and sub-contractors whogo into liquidation during the construction period. Thiscan lead to significant delays and extra costs arising asthe project sponsor has to re-tender the remainingwork. Identifying a new contractor to complete another

contractor’s work is difficult because of the possibleliabilities that the new contractor would have to acceptfor another company’s work.

Funding Problems

The overall lack of finance to complete a project, ordelays in the payment for services by the projectsponsor can lead to significant problems arising. If thecosts of a project have increased significantly beyondthe original estimate, then work on the project mayhave to stop or be delayed until additional funds can befound.

Funding problems can also arise if funds allocated toone project have been diverted to other projects withina programme of development.

If the payment of invoices by a project sponsor is slow,the contractor may begin to commit less resources to aproject, and may even cease work if cash flow becomesa problem.

In some cases, even when a project is expected to beentirely profitable, project sponsors may understate theavailability of local funding simply in order tomaximise the level of grant. This can happen withrevenue-generating projects particularly. Suchpractices can reduce the availability of funding forother projects.

Land Acquisition Costs

The land on which a project will be built is not alwaysowned by the project sponsor. Where this is the case,local government authorities can usually compulsorilypurchase the land in accordance with legal statutes.The statutes usually require that the land (and anyproperties on it) are valued and that compensation ispaid to the owner on the basis of the valuations.Although the right to purchase and actually develop theland can be agreed relatively quickly, the amount ofcompensation that actually has to be paid cansometimes not be agreed until the end of the project,especially if the land owner appeals against the originalvaluation. The owner may have the right to appeal andit is up to a Court to agree a fair price for the land. Inmany cases, this may be greater than the originalforecast by the project sponsor. Inevitably, long drawn-out compensation cases will delay a project.

Force Majeure

This term covers a range of events which are alsocommonly referred to as “Acts of God”. They include

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revolution, war, riot, extreme weather, earthquake,landslip, fire, political and economic instability.Usually, the contractor is required to insure againstsuch events happening. Where they do occur, they willnormally lead to significant delays occurring and,consequently, cost increases.

Other Factors

In addition to all the categories listed above, experienceshows that problems also arise from premeditatedunder-estimation of initial costs simply in order toobtain initial approval for a project. This can lead tomajor projects being approved, and started, in theknowledge that actual costs will be very much higherthan the “agreed” estimate. Once started, a high profileinfrastructure project is often politically difficult tostop. So, when the true costs do become apparent, it isdifficult for authorities to refuse the additional fundingrequired to complete the project.

3.3 Typical analysis of project costs

As well as understanding the process by which costestimates are calculated and how they may vary duringconstruction, it is worthwhile having some under-standing of how important the different cost elementsare, and how sensitive they may be to a range of costvarying factors. The tables following this page providea general analysis of the typical proportion of totalproject costs acccounted for by major cost elements.The tables are not absolute benchmarks but aredesigned to guide desk officers in their generalunderstanding of the relative significance of differentcost elements and cost varying factors.

Table 1 provides estimates, for seven different types ofinfrastructure projects, of the typical proportion of totalproject cost that is accounted for by specific categoriesof cost. A range is given to show how proportions mayvary from project to project.

The matrix in Table 2 gives an indication of the degreeto which some of the cost categories may change inresponse to the influences of the main cost-changingfactors identified. In this table, “Site Preparation” hasbeen listed as a separate element of “Building &Construction” cost. This is because unexpectedproblems with ground conditions most frequentlyimpact on the cost of site preparation works.

The ranges given for the different categories making upinitial costs, (Table 1), may enable desk officers tojudge whether or not particular project submissionsneed to be interrogated. If, for example, a projectindicates that land purchase costs for a sewagetreatment plant amount to 10% or more of total costs, adesk officer should be alerted to ask questions. This isbecause in typical projects of this nature, land purchasecosts do not exceed 1% of total costs.

Again, if a project sponsor indicated that poor groundconditions was the reason that plant and machinerycosts turned out to be higher, the desk officer wouldneed to interrogate the project. This is because Table 2shows that, typically, unforeseen ground conditions areonly likely to significantly affect site preparation costs(part of the construction costs). Plant and machinerycosts are most unlikely to be affected by this factor.

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Table 1

Major Cost Elements and Indicative Share of Total Cost for Seven Infrastructure Types

Motorway Motorway Sewage Water Supply Public Energy 1 (3) Energy 2 (4)

Dual (1 km) Dual (1 km) Treatment Network (1) Building (2) CCGT City Gas

Rural Urban Plant 50,000 50,000 15,000 m2 Power Distribution

Area Area people people Station Network

Planning/Design 3-5% 3-4% 3-5% 5-7.5% 10-15% 5-10% 5-10%Fees

Land Purchase 3-5% 20-30% 0-1% 1-2% 5-15% 0-10% 0-10%

Building & 75-80% 60-65% 40-41% 75-80% 25-38% 15-30% 20-35%Construction

Plant & Machinery na na 40-41% na 10-18% 50-60% 40-50%

Contingencies 10% 10% 10% 10% 10-15% 10-20% 10-20%

Notes: Because a percentage range is given for each cost element, columns do not sum to 100%

1. 10 km pipeline from existing reservoir with new treatment plant and new mains network2. Eight storey building in urban area with offices and function rooms3. 60 MW station with 20 km of transmission lines feeding into main grid, sufficient for a settlement of 50,0004. LPG storage plant with 500 km pipeline network (15% primary distribution, 85% secondary distribution), 250,000

population

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Table 2

Effect of Cost-changing Events on Key Cost Elements; (Major or Minor)(1)

Cost-changing factors

Cost Elements Design Land Poor Unexpected Inflation/ Difficulties

Changes Acquisition Project Ground Relative with

Problems Management Conditions Price Rise Contractors

Planning/Design Fees

Land Purchase

Site Preparation(2)

Building & Construction

Plant & Machinery

Notes:1. Large dot denotes a major effect – potentially 20% change for affected cost elements

Small dot denotes a minor effect – typically 5% change or less for each cost element affected.2. “Site Preparation” is identified as a separate element of Building & Construction costs because it is here where the

main effect of unexpected ground conditions is experienced.

Source: (Both tables) – Researched by consultants, Ove Arup & Partners, based on experience of public and private sectorprocured projects in various EU Member States.

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4. Methods ofControlling Costs

The purpose of this section is to review ways in whichthe cost and time management of projects can beimproved by risk management and by more realisticestimation of contingency budgets. Whilst this isultimately the responsibility of project sponsors andtheir project managers, an understanding of theprinciples involved should also be of value to deskofficers and other users of this Guide in theCommission.

4.1 Uncertainty in pr oject costings

The preparation of project cost estimates is a difficulttask because construction projects are subject to risksand uncertainties, particularly in the early stages whenvery limited information about the project is available.Yet, the cost estimates prepared at this stage are mostimportant to the project sponsor because they oftenform the basis of the bid for funds.

As a project progresses, more information becomesavailable to allow costs to be calculated to a greaterdegree of accuracy, for example the ground conditionson-site or the specific types of plant or machinery thatwill be provided. More reliable cost estimates becomeavailable after tenders have been received fromcontractors.

Nevertheless, many aspects remain uncertain andnormal costing practice is to include an extra elementto provide “insurance” against cost over-runs. Theword “contingency” is usually used to describe thisadditional cost element. As was shown in Table 1different amounts are typically allowed in differenttypes of projects.

The contingency is typically based on a “rule ofthumb” calculation, as a certain percentage of the basecost estimate or a lump sum based on the experience ofthe estimator. A figure of 10% of gross costs is acommon allowance. This risk allowance orcontingency sum is often calculated only once and isnot reviewed again as the project progresses.

The main weakness of this simple approach tocontingency costing is that individual risks are notseparately evaluated. As a result, a contingency is often

set too high for low risk projects, or too low for highrisk projects. In addition, it is not always appropriate tocarry a specific contingency allowance for the durationof a project since many of the risks become known andcan then be eliminated.

4.2 Risk and contingency planning

By giving greater attention to which cost determiningfactors are most likely to change, and why, projectsponsors should be able to develop more accuratecontingency estimates. This in turn should reduce therisk of cost over-runs. Poorly managed risk affects theability of a project to be completed within time and onbudget. On the other hand, the level of risk can often bereduced if project sponsors take the time to identify,assess and manage the main factors leading to costescalation.

Although a potentially complex subject, riskmanagement basically involves three quite simplestages:

• risk identification: what could go wrong?

• risk assessment: it is possible to quantify or at leastrank any of the risks?

• risk management: what steps can be taken tomitigate or manage these risks in order to preventcost over-runs?

Once the risks have been identified and assessed, theymust be continuously monitored until the end of theproject. Although careful risk assessment typicallyresults in an increase in initial cost estimate, it usuallyleads to a reduction in contingency. Risk managementmeasures are worthwhile because they lead to a morecertain final project cost.

Often it is not clear what is actually contained within aproject’s contingency budget. As noted above, it couldjust be a general percentage estimate. In careful riskmanagement the contingency allowance for largerprojects should cover three main types of contingency:

• Special risks contingency– an allowance to coverthe risks arising from higher land acquisition costs,changes in external factors such as the availabilityof funds, statutory requirements and force majeure.It can also cover the risk of a project sponsorchanging his mind about the project specification(a fairly common occurrence!).

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• Design contingency– an allowance for use duringthe technical design process to provide for the risksof changes due to design development or inestimating data.

• Construction contingency– an allowance for useduring the construction process to provide for therisk of changes due to site conditions or as a resultof changed construction methods or poorperformance by contractors or sub-contractors.

The use of a better specified contingency will only beeffective if suitable project control procedures are inplace to control all aspects of project performance.Project control procedures should be organised andmanaged by the project manager. They should provideessential, coherent management information so that theproject sponsor and project manager can react tochanging circumstances.

4.3 Project management

Finally, improved contingency planning can never be asubstitute for good project management.

The essential elements of good project managementare:

• Cost control: managing the design andconstruction processes to achieve best value formoney and ensuring that the final cost does notexceed the budget.

• Time control: managing the design andconstruction processes so that the project iscompleted on or before the agreed completion date.

• Quality contr ol: ensuring that the quality andperformance of the completed project meets theproject sponsor’s original objectives.

• Change control: ensuring that any changes thatare necessary are achieved within the approvedbudget, that they represent good value for moneyand that authorisation to proceed has been obtainedfrom the project sponsor.

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5. An Appr oach toCost Appraisal andMonitoring

5.1 Project interr ogation

The purpose of this section is to provide desk officerswith a set of questions to ask and issues to considerwhen appraising project applications or whenmonitoring ongoing major project claims. It should beused in conjunction with the existing appraisal systemsfor ERDF funds and the regulations of the Programmein question.

The various issues are based upon the precedingsections of the Guide which have identified the mainfactors that can lead to time and cost over-runs. Theappraisal questions suggested here are not designed toensure that all projects will be implemented withoutany problems. They are to assist the desk officer toexplore the factors that can contribute to an ill-conceived project being approved and to understandwhy an existing project is requesting additional grantduring the implementation stage.

In most cases, the initial project submission shouldaddress all of the relevant issues and satisfy the deskofficer regarding the validity of cost estimates. It isalso important that all sections of the application formare completed, particularly those in relation to costs.Where there are gaps in the cost details provided, it isoften not clear whether the cost heading is not relevantto the particular project, or has perhaps been combinedwith some other cost, or even that the sponsor hassimply failed to insert the relevant figure. Interrogationmay be necessary to establish the actual position. Thedesk officer should raise any queries with the projectsponsor or refer the project to appropriate specialists ifthe issue cannot be resolved.

Diagram 4 divides the project development cycle intosix stages. For each stage, parallel groups of projectinterrogation questions are also included. These groupsof questions are discussed in the following text as“Risk Issues”. Some questions are relevant at morethan one stage. When interrogating a project, deskofficers should first establish the stage of developmentof a project and then use the relevant questions.

The diagram also shows graphically how risk (of costand time over-run), decreases as a project progresses.

Risk Issue 1: Project Specification & Feasibility

The key issues concerning the project’s specificationand feasibility relate to whether there is a need for theproject and whether a budget cost (the maximum cost asponsor will wish to pay for the project) has beenidentified by the sponsor. It would also be appropriateat this stage to check if a Cost Benefit Analysis hasbeen undertaken and a project manager with provenexperience appointed.

The project description should not be technicallycomplex. The project’s objectives should be clear,consistent throughout the submission, and achievable.Simple questions should be asked such as:

• where is the project being undertaken?

• what exactly does the project comprise?

• why is the project being undertaken – what is thedemand?

• what previous phases have been undertaken andwhat phases are not included in the application(including costs)?

• is this project directly dependent upon any otherprojects?

• who is undertaking the project and over what timeperiod?

Risk Issue 2: Outline Design

At the outline design stage, the key issues are whetherthe size of the project matches the identified needs, orwhether it is over-designed. It is important to establishhow much more design work will be required and whatrole the contractor will have in this process. If costestimates are based on outline designs only, then thepotential for costs to change is greater than if they hadbeen finalised.

For large projects it would also be appropriate for aRisk Assessment Study to have been undertaken by thisstage. This would show that the project sponsor wasaware that specific risks existed which could affectproject costs. This would form the basis for thecalculation of the contingency budget. It should bepossible for the appraiser to establish how thecontingency was calculated and what risks it covered.

1

2

3

4

5

6

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Diagram 4

The Project Risk IssuesDevelopment Cycle

What feasibility work has been undertaken?Has project sponsor experience of this type of project?Is the project dependent upon other phases or projects?Has a project manager been appointed?

Risk d

ecreases

Does the outline design satisfy the specification?Who will be doing the detailed design?Do cost estimates allow for changes to outlinedesign?What risks are allowed for in the contingency?

Have relevant consents procedures been completed,including planning permission, EIA, operationallicences, public consultation?Has all land been acquired and compensation agreedwith owners?What issues are outstanding from the above?

Is the outline design clear enough for detailed designand costing to be completed satisfactorily?Have bidders had enough time to prepare realisticallycosted bids?Has the project sponsor worked with this contractorbefore? Is the contractor of sound financial standing?Have ground conditions been properly investigated?Is the risk of cost over-run dealt with in thecontract?Is the funding in place to pay the contractor?

Are project management arrangements working?Are payments to the contractor being made on time?Is the project currently on schedule and withinbudget?Are any of the risks indentified in the contingencybudget being experienced; how are these being dealtwith?

Is it clear in the contract exactly what works arerequired for completion of the project?Have handover procedures been established?What are the final payment arrangements?

Project Specification & Feasibility

Outline Design

Consents & Land Acquisition

Detailed Design & Procurement

Project Construction

Hand-over of Project

Cost Time

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Risk Issue 3: Consents and Land Acquisition

The appraiser should be aware of what stage the projectsponsor has reached with regard to consents and landacquisition. A project can experience considerabledelays which may affect costs if the appropriateplanning, environmental and other consent procedureshave not been adhered to.

As regards land acquisition it is important that theappraiser is aware of whether all claims have beensettled or if there are any appeals over compensation. Ifappeals have not been settled then there is a highprobability that any original land acquisition costs willbe an underestimate.

Risk Issue 4: Detailed Design

At the detailed design stage, the procurement ofcontractors to undertake the construction work can takeplace. In some cases, appointment of contractors mayprecede the detailed design stage. The form of contractand the respective roles of project sponsor andcontractor in bearing risk for the ultimate project cost,are matters that desk officers should inquire about,especially where there appears to be uncertainty in thisarea. It is also important to establish that procurementregulations have been followed and that the contractorhas relevant expertise and experience.

Desk officers should check whether groundinvestigations have been undertaken. If these have notbeen done, then the risk of cost over-run increases andthe contingency should reflect this.

Risk Issue 5: Project Construction

During the construction phase, there needs to be aproject management structure in place which allowsfrequent reporting of progress to be made between thecontractor and the project sponsor. Most of the timeand cost over-run factors that can occur, do so duringthe construction phase. The appraiser must thereforeestablish that the main risks taken into account in thecontingency calculation are being managed on site.

Risk Issue 6: Handover of Project

The project sponsor should state when the project isscheduled to end. It should be clear whether the projectwill be complete and fully operational once the ERDFgrant has been used, or whether further phases have tobe implemented.

5.2 Conclusion: use of this guide

The purpose of this Guide is to improve desk officers’understanding of the project development process. Thisis so that they will be in a better position to interrogatethose projects where there is reason for concern overinitial project costs, or changes in these costs.

The Guide will serve as a further tool within the overallevaluation framework for which DG XVI hasresponsibility. As such, it may be used alongside otherdocuments including the Commission’s Guide to CostBenefit Analysis of Major Projects and the Structuraland Cohesion Fund regulations.

It is unlikely that the Guide will resolve all problemsrelated to cost and time over-runs. Nevertheless, byimproving the ability of desk officers to probe projectswhere there is concern about the cost structure orchanges in costs, it is hoped that project sponsors in theMember States will themselves be steered towardsprogressively better practice. This will ultimately be inthe interest of Member States’developmentprogrammes. This is because more robust costing ofindividual projects will mean it is less likely that fundswill have to be diverted from other projects orprogrammes, to cover cost over-runs.

Use of the Guide will not eliminate the need to referdifficult cases to specialists when necessary.Neverteless, when desk officers have become familiarwith the principles and practices outlined in the Guideit may be that less frequent use of such specialistservices will be necessary.

Although every attempt has been made to prepare thisGuide in a way that can be used across all MemberStates, it is freely acknowledged that it may not bewholly appropriate to every aspect of the projectdevelopment process in some Member States.Nevertheless, the general principles of cost and riskidentification will have some relevance in allinstitutional settings. With careful judgementtherefore, desk officers should be able to make use ofthe Guide in most situations that they will encounter.

It is envisaged that the experience developed by deskofficers and others in using this Guide will be used inthe preparation of future revisions of the document.

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Glossary

Consents procedures – Institutional processeswhereby development approval is secured, includingland use planning, environmental, operational andsafety aspects.

Contingency – An amount included in the costing of aproject to allow for unexpected factors which couldresult in the original cost estimate being exceeded.

Contractor – Specifically, any individual or group thatenters into a binding agreement to provide specifiedgoods or services; in the context of this Guide, acontractor is a construction company which undertakesto build a specified project for an agreed price andwithin an agreed timescale.

Cost over-run – An instance in which the provision ofcontracted goods or services are claimed to requiremore financial resources than was originally agreedbetween a project sponsor and a contractor.

Detailed design – Description of a constructionprocess, in drawings and words, to a level that permitsfully itemised costing of a project and the preparationof a clear programme of works to implement it.

Inflation – A general increase in the level of prices ina country, caused by aspects of that country’s macro-economic policy or the impacts of the policies of itsmain trading partners. (To be distinguished fromchanges in the relative prices of particular goods andservices which may result from technologicaldevelopments or from localised increases in demandfor those goods or services).

Outline design– Description of a construction process,in drawings and words, to a level that permits mostconsents procedures to be carried out and a generalestimate of project costs to be made.

Procurement – The method whereby a contract toprovide goods or services is established. Differentmethods involve different roles and responsibilities forthe project sponsor and contractor respectively.Examples are: competitive tender based on a projectsponsor’s detailed design; design and build; and design,build, finance and operate (DBFO).

Programme – A group of projects, implemented withsimilar overall objectives, and usually financed from acommon funding source such that financial over-runsin one project may affect the availability of funds toother projects in the programme.

Programme manager– The individual or institutionresponsible for delivering the programme as a whole.

Project – The specified construction works, includinggoods and services, that are the subject of a contractbetween a project sponsor and a contractor.

Project manager – The individual responsible fordelivering a project within the cost and timescaleagreed in the contract. The project manager may beemployed either by the project sponsor or by thecontractor. Alternatively he may be appointedindependently by the institution providing a major partof the funding for the project.

Project sponsor – The individual or institutionresponsible for initiating a project and who thus entersinto the contract with the construction contractor toprocure the project. Alternative terms for the projectsponsor include “client” or simply “owner”.

Quantity surveyor – The professional responsible fordetailed itemising of the works and materials involvedin building a project and also for the pricing of theseworks and preparation of a detailed programme forimplementing the project.

Risk – The probability that, despite careful projectcosting and planning, unforeseen events will occurduring the implementation of a project which willaffect the final cost and completion timescale.

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Appendix

A: Poor Practice Projects

B: Good Practice Projects

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A: Poor Practice Projects

Sewerage Project

The project’s costs were originally estimated at 4.7 MECU but increased by almost 20% to 5.6 MECU. Theincrease in costs was primarily due to the contractor going out of business during the construction phase ofthe project.The project was delayed for 8 months whilst new tender and contract documents were prepared.During this period of delay VAT increased by 2.5% which was unexpected and further contributed to the costincrease.

Road Project

The project’s costs increased by 10% and was delayed by at least three months due to adverse weatherconditions during the initial ground works stage.The increase in costs was due to:• inflation over a two year period• higher legal costs for land acquisitions – a higher number of cases required arbitration and had been

referred on to the High Court • unexpected ground conditions.

Road Project

The project’s costs increased by 20% due to the following factors:• the project was delayed because it was found that the contractor had no experience of a particular type of

construction and sub-contractors had to be found• land acquisition costs were higher than originally envisaged• design changes due to unexpected ground conditions being experienced and the need for environmental

features not originally envisaged.

Road Project

The project’s costs were originally estimated at £9m but this increased to £12.24m.The increase was due to:• design changes to allow for increased loadings and environmental standards (£1.75m)• further land acquisition than was originally envisaged (£0.3m)• inflation since the original estimate was made in 1993 and the project was completed in 1996 (£1m).

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Road Project

The project’s costs increased by 20% due primarily to the fact that the implementing authority had littleexperience of a project of this scale.The costs for all elements of the project were flawed and it was only atthe tendering stage that these flaws came to light.

Sewerage Project

The project’s costs increased by 20% due primarily to an underestimate of the time and cost involved in on-site demolitions and excavations.

Company X – Project Funded by a Major International Funding Institution (non-ERDF)

The Problem

It was expected that any investment costs after the initial development costs would be covered by internalfinancing.Therefore total planned investment cost did not contain essential investments for further developingthe project, nor did the investment plan incorporate early year operational losses.

The Recommendations

For proper assessment of project finance deals it is essential to compose an investment plan which includesall costs required to complete a project, including operational losses during the start-up years. It allows thepartners and participating banks in the transaction to provide sufficient funding, without being fully dependenton future year internally generated cash. In these transactions it is important that the estimated finance costsduring the start-up phase are taken into account and that at least 10% of capital expenditure is incorporatedin the investment plan under a clearly specified contingency cost category. Although project funds andguarantee agreements usually provide for obligations of the sponsor to fill eventual financing gaps, anagreement among partners at the start of the project on how to finance cost increases, mitigates the project’sfinancial risks.

A strong strategic investor’s financial strength was essential when additional funds were required tocompensate for the lower than expected cash generation for investment purposes and to finance cost over-run on capital expenditures.

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Major Project in CIS (non-ERDFfinancial institutions)

Reasons for Cost Over-Runs

In general, the underlying theme for cost over-runs is inexperience in the CIS system, compounded byoverconfidence in the Western system. In the planning and development stages, the project was approached toomuch from the Western perspective, applying Western project rationale without adequate attention to theproject country’s perspective and cultural differences. Insufficient attention was given to important details,labour resources, construction equipment, logistics and scheduling that would be affected by the culture,traditions and labour practices.The primary reasons for cost over-runs are as follows:

General Lack of Experience in Foreign Projects

The sponsor and the consultant company relied too heavily on the assurances offered by their local partnersin the joint venture. The sponsor should have insisted on a more thorough investigation of the localconstruction company’s capabilities, including their ability to supply the promised construction equipment andskilled labour, and their past project experience. The lack of investigation and follow-through greatly impactedupon the completion of construction and of increased costs throughout the entire project. There was acomplete underestimation of the local labour force regarding their productivity and technical proficiency. Thesponsor and the consultant company did not verify the validity of the local construction company’s costestimate and did not budget sufficient contingency funds in view of the extremely tight construction and start-up schedule for an operation of this magnitude.

Freight Costs

An inadequate assessment of the complexity of the project site along with the long logistic chain proved verycostly. Equipment which the local construction company failed to supply had to be air freighted from the USAto mitigate construction delays. More costly air and truck transportation replaced rail transport in order tospeed delivery of the spare parts and maintenance inventory requirements of the operation.

Underestimation Of Costs For Spare Parts and Maintenance

The need for replacement parts and maintenance costs for the processing cycle were underestimated. Deliverydelays necessitated a storage of 12 months of inventory on-site rather than the initial 3 months plan.

Operating Cost Over-Runs

These are driven mostly by labour, maintenance, power and freight. The labour costs were higher andproductivity lower than budgeted. Higher maintenance costs were due to the fact that more replacement partswere required than budgeted for. Power rates were raised after the project was operational, making themhigher than originally estimated. Freight costs were much higher than planned driven by a substantial use of airand truck freight to satisfy maintenance inventory requirements.

Inadequate Design of the Plant

The initial feasibility study was inadequate. Final engineering and design changes had to be made to include morebuildings and equipment. Extra costs were incurred for materials, engineering, procurement, equipment, labourand general management throughout the entire fabric of the operation.

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B: Good Practice Projects

In projects that demonstrate good practice, the projectsponsors can usually give positive answers to thefollowing questions:

• is the customer able to procure and manage majorprojects as this is crucial?

• has he the experience in procuring contracts?

• have the customer/contractor worked togetherbefore?

• does the customer appreciate the key issues andkey areas of risk?

• does the customer understand and know what hewants?

B.1 Airport Project

The project involved a major new two story extension to a terminal building costed at over £35m. Thecontract was awarded on a Design, Manage and Construct basis. During the initial 18 month design perioddetailed work was undertaken to identify the project budget. A Guaranteed Maximum Price (GMP) wasagreed between the client and the contractor.The key success factors were:• close working relationship between the client and the contractor from the beginning, involving senior staff

commitment;• clear definition of the client’s design at the outset;• early agreement on the client’s total budget;• sufficient time to develop the client’s brief and carry out value management exercise (which led to the

GMP);• use of client’s own in-house designers for specialist components thereby avoiding specification problems;• a flexible approach during the design phase to incorporate client changes;• agreement of a detailed specification for the project prior to construction work;• appointment by the client of a senior resident project manager to control the interface between the

contractor, the airport management and the public;• a formal two-day team-building exercise between all members of the client and contractor project team

was held to develop a good working relationship;• experienced project management team put in place.

B.2 Road Project

The project involved the construction of a major road interchange valued at over £25m. The contract wasawarded on a fixed price Design and Construct basis.• the client prepared a detailed specification stating exactly what technical, aesthetic and contractual

requirements were to be;• the timescales for preparation of tenders and completion of the project were realistic;• detailed site investigations were made the responsibility of the tenderers;• employer, recognising the difficult conditions, agreed to pay for more ground investigations;• the client and the contractor had worked together in the past.• the client adhered to the brief and no variations were issued;• the client placed an experienced engineering team to audit the contractor’s QA system and provide on-

going support in terms of new engineering approaches and traffic management.