Big Projects use Cost Controls – Why don’t You?

The use of project cost controls solutions is becoming pretty widespread these days amongst bigger construction organizations that execute on capital projects. For any big, billion dollar project (or any number near that), it’s understood that proper planning, cost controls and detailed progress reporting will be followed on that size of project. They have to. There’s just too much risk otherwise.

Even 10 years ago, however, it wasn’t necessarily the case. There have been many bad years and a poor track record from the “project cost overrun” point of view in the world of big projects. So bad that people have got quite used to hearing about the colossal project cost overruns – you know the ones, the $3-billion project that ballooned into an $8-billion dollar project like it’s just a part of life. People have got so used to it that they’re often amazed to hear about these big projects that are actually running on budget and on schedule. The reality is, however, that projects which do actually run on budget are becoming more common. The big disasters still happen from time to time, but it’s becoming more and more infrequent. And that’s largely a result of: better planning, better controls, better information and better tools to get all that with.

For a $1-billion project to go over-budget by even a modest 10% – that’s an enormous amount of money. Even for big companies & governments.

They simply can’t afford to NOT use a cost controls solution.

Unfortunately, this adoption of cost controls hasn’t trickled down to the typical mid-sized organization.  For this tier of company – the ones that are running $10-million to $100-million projects – they still mostly use spreadsheets and paper-based systems, along with the GL in Quickbooks, Dynamics or Business One.

This is a big problem. The risk to a mid-market company is the same as it is to the large organization running the billion dollar projects. It’s just a different scale. A $10-million project that goes over-budget by 10% is still a lot of money – especially for that size of company. This size of project is – relatively speaking – just as complex as the big capital projects: many moving parts, labor, equipment, materials, complex WBS, phases, procurement, multiple subcontractors, suppliers, the need for progress measurements, etc. Far too complex for a spreadsheet or paper-based system to handle properly.  Nevertheless, those are by far the most common tools to manage these projects: spreadsheets and paper; maybe MS Project or Primavera on the scheduling side.

Part of the tragedy with this is that the small and mid-market companies are even at a higher risk.  They don’t typically have the deep pockets to absorb a lot of project cost overruns; so if they suffer a series of projects that go over budget; that could seriously impact their ability to survive as a business.

So, why is this happening? Why don’t the small and mid-tier companies adopt better cost management practices and tools? Well, there are a few reasons for this. First of all, small and mid-market businesses often experience a period of growth where their internal processes and tools don’t keep pace with their business growth. They take on more projects, bigger projects and more complex projects; and their eagerness to grow their business overshadows their need to also step-up their controls practices.  They started with a spreadsheet or 2 and just continued to add complexity to those as their projects got bigger.  Despite spending an excessive amount of time managing essentially unmanageable spreadsheets, the motivation to change that solution becomes lost in the weeds of day-to-day correcting cell formula errors. At this point they often also feel a sense of ownership with the amount of personal investment they made in creating their home-grown solution, and are reluctant to discard it.

Many do of course, realize there must be a better answer out there and begin hunting around for something that might replace their current solution. Which leads me to the second reason there hasn’t been mass adoption of cost controls at this tier of company: knowing what to look for. Unless an organization has an experienced project manager or two on staff, they may never even have heard of project cost controls or project cost management as a software solution. Without knowing any better, they’ll likely seek out something that solves their top 1 or 2 pain points; which may be any number of things such as: cost tracking, invoicing, EVM, estimating, change order management, purchase orders/procurement, customer reports, document control, committed costs, RFQ tracking, HSE, etc. At which point they may end up with something that resolves only one of the numerous highly-connected components that need to be addressed when running complex projects. And end up having to continue using their spreadsheets and being only a tiny bit further along in improving their life.

The third reason: is that some companies actually resist taking the leap towards a cost management solution because of a simple barrier of effort and time. People are busy. It’s challenging to stop for long enough to take a breath and change a fundamental part of how people manage their projects. Looking at what a cost controls software product can do, they feel a daunting black hole of unknowns that scream, “how on earth do I get there from where I am down here in this tangle of spreadsheets?” To compound that fear-based hesitation; is there may be difficulty in quantifying the potential end result of making the change. What I mean by that, is without good current knowledge of cost overruns, productivity issues, efficiency issues, or issues with subcontractors or suppliers; a company may not actually know how much they’re losing – and how much they could improve by adopting better tools. As long as there’s more money in the bank this month than last month, things must be okay, right? So they fumble along hoping for the best.

The fourth and final reason:  companies hesitate because of a perception of cost. It’s true that many project cost control software solutions on the market today aren’t a good fit for this size of company. Big, complex software products that are designed for big infrastructure projects and which are not in a price range that is within reach of the mid-market company running even a $100 million project.  So unless they do a bit of digging, they may not be aware that there are solutions which are targeted more at the needs and capacity of the tier of company that isn’t running multi-billion dollar projects – so they choose to opt-out of searching.

So, here’s the long and short of what I’m getting at: any mid-market company that runs complex projects and isn’t using a cost controls solution is very likely losing money. It’s as simple as that. They could in fact be losing a lot of money. Even if they are turning a profit from their projects, there’s a good chance that profit is at least 15%-20% lower than it could be. They’re also taking on far more risk than they need to. Not just from the cost overrun point of view. There are the additional legal risks to add to the mix. Without good tracking and controls in place, the chances of being able to reasonably defend a contract dispute or misunderstanding become much more difficult.

I’d encourage people to have a look around at the solutions that are available and find the time to put these practices into place. It’s a small investment for a huge return and may just save your business from some unnecessary cash-flow and risk difficulties.