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Methodical Errors behind most Budget
Overruns!
A daunting number of industrial development
projects around the world run into budgetary problems. No region is
spared. Why? Most criticisms in the aftermath of disaster projects
put the blame on bad project management. In the nineteen-nineties
thirty multi billion dollar projects on the Norwegian Continental
Shelf (NCS) were hit hard. Did the international oil business –
including the world’s foremost engineering and construction companies
- really manned all their NCS projects with an unqualified staff -
simultaneously? Certainly not. Naturally there are several causes to
budget overruns, but there is one predominant methodical error
which is clearly visible in nearly all disaster projects.
Source:
Norwegian Official Analysis NOU 11 1999
The curves in the graph
above show how the unit-cost of historic offshore production
facilities decreases remarkably with increasing facility
size! Some readers have seen this before, others have not. To both
groups; if this downward trend is true - and we can assure you that
it is - how do you provide for this in your budget? Certainly you
will agree that for the relationship;
Budget estimate = Cost at completion
to be true, either side of the equation must
behave identically? So which items in your budget estimate decrease
with increasing job size? And how does contract size come into this?
Thirty years of experience show that failing to comply with this ‘law
of nature’ is the prime reason for cost overruns in projects
internationally! This is THE major methodical error in project cost
control. Plot a few data from your own historic projects and see for
yourself.
CERA Databank statistical tools and estimating
algorithms have complied with this law of nature for more than twenty
years. The technique has been described in the most reputable PM
journals. CERA Databank is low cost and flexible. Modify the system
for your own needs and install on your own server.
Lessons Learnt from
more
than
Thirty Years in Upstream Oil and Gas Project
Management:
Lesson #
1:
The
majority of cost overruns are the direct result of malpractices in
budgeting work and fundamental misinterpretations of statistical
(historical) data.
Continue....
Lesson
# 2:
The correlation between field economy and size and type of
development concept is
either not fully understood, or the tools required to investigate this correlation to its full extent
are not available.
As a result the optimum
development option is often overlooked.
Continue....
Lesson # 3:
Misinterpretations of statistical data also lead to the misconception
that productivity varies more between
companies
(or
countries ) than is really the case.
Continue.... Lesson # 4:
Winning a
construction contract is seldom proof of a higher competitiveness.
Continue....
Lesson # 5:
The most
ambiguous explanation to cost overruns is that the project
is unique and very complex compared to other projects.
Continue....
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