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Project overruns: avoiding arbitration

By Susan Howick - Posted on 13 June 2019

Large projects can go wrong and overruns can increase costs. Management Science academic Professor Susan Howick discusses one such case and how ongoing work at Strathclyde aims to help avoid project overruns.

Examples of large projects that overrun in time and cost are all around us – the Scottish Parliament, Channel Tunnel, Boston’s Big Dig, Sydney Opera House to name just a few. Cost overruns for construction or engineering projects can be substantial and result in huge losses for contractors who have agreed a fixed price for their work. In an attempt to recuperate some of their losses contractors may seek compensation from the customer for the work. 

However, proving who is to blame is not easy. Cost overruns often result from an excessive amount of disruptions and delays throughout the duration of the project. Such disruptions and delays can create complex consequences that can be extremely difficult to unravel making it difficult to understand which parties were responsible for the overruns.

Over a five year period my colleague Professor Colin Eden and myself were involved as expert witnesses on a multi-billion euro arbitration case. A large construction project had overrun excessively in time and cost and a contractor and customer disagreed on who was responsible for this overrun. We were hired by the customer to audit a model that had been created by experts hired by the contractor. This model was attempting to explain the causes of the multi-billion euro overrun.

The type of modelling used was System Dynamics. System dynamics has a history of supporting claims for project overruns dating back to the 1970s when Ingalls Shipbuilding first used it to support a claim against the US Navy. System Dynamics enables the interactions between events on a project, including disruptions and their impacts, to be considered. The complex consequences resulting from the interactions between many different events is a reason why it can be so difficult to unravel the causes of project overruns. System Dynamics allows the impact of individual disruptions on the project to be explained and quantified.

Over a 20 year period a team at Strathclyde used System Dynamics, alongside other modelling approaches, to support a number of claims for compensation. I was part of this team which was led by Professor Colin Eden and also included Professor Terry Williams (now at University of Hull) and Professor Fran Ackermann (now at Curtin University).

The multi-billion euro construction project previously mentioned provided us with a different perspective as it was the first time that we had been hired by a customer. Instead of building a model to support a claim for a contractor, we were auditing a model on behalf of the customer. The work involved producing five expert reports and appearing twice in front of an arbitration panel being grilled for many hours by the contractor’s lawyers. I have to admit that I have had more pleasurable experiences in my life! However the case settled last year with a favourable outcome for the customer.  

Project overruns are unfortunately too common. Rather than having to go through lengthy and very costly claim processes, work at Strathclyde seeks to contribute towards avoiding project overruns. Based on the learning we have gained with respect to why projects go wrong, we have been working with organisations to develop new project risk evaluation tools. These tools specifically take account of the interactions between risks. Traditional tools, such as a risk register, assume risks are independent from one another whereas, in reality, risks interact creating complex consequences for a project. Risk evaluation tools need to take account of these interactions so that we are able to better understand, and manage, the complex risks and disruptions that our projects face. More information on work in this area can be found here

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