Friday, December 5, 2014

What to expect from mega construction projects

The Times carries an excellent story of yet another grandiose trophy project - the nearly $4 bn World Trade Center Transportation Hub - which is facing massive cost over-run and execution delay.

The Hub, with its winged "Oculus" pavilion, designed by the famed architect Santiago Calatrava, is being developed by the Port Authority of New York and New Jersey. It is estimated to cost about $3.7 bn when it is likely to open in 2015, many years delayed and at more than twice the original estimate when the project was unveiled in 2004. After all this spending, it turns out that instead of being a predominantly transportation hub, the project would in all likelihood end up being a "high-priced mall, attracting more shoppers than commuters".

The experience from this and numerous other similar projects points to a few important lessons that appear universal for such projects

1. Cost over-runs and time delays are unavoidable, unless you are doing it in China. It is therefore appropriate to factor in this at the beginning using some form of "optimism bias" to accommodate the inevitability of delays and cost over-runs. This would help all parties - government agencies, developers, financiers, and citizens - appreciate the real challenge, instead of being misled by the highly deceptive initial estimations.

2. Star planners, designers, and architects are more likely than not to disappoint. However, this cannot be a reason for not considering them. They are essential to meet the client's (a political leader or a wealthy promoter) aspirational hubris, atleast when the project is initiated. It is just that the hype surrounding any sales pitch has a dynamic of its own which camouflages reality and most often fuels excessive expectations. Even other wise, plans submitted by them are likely to run into technical (it is rarely possible to literally translate the design into physical structure - any change to the design, which is mostly inevitable, to get it to suit field conditions is most likely to disrupt/compromise the original promised effect) and financial (it is too expensive to translate the design literally) challenges. Either ways, when the promised effect does not materialize and disappointment sets in, the architect/planner would blame it on the developer/government failing to keep its side of the contractual bargain.

A rigorous enough analysis of the design/plan (so as to test its aforementioned technical and financial dimensions) that can anticipate all possible technical/financial contingencies is almost impossible at the initial stages of a project. The emergent dynamics of these large projects are difficult to anticipate. So being disappointed with the work of star architects/designers is par for the course.

3. Much the same fate is likely with other important external service providers like project managers, owner's engineers, master planners, and construction contractors. This assumes significance since almost $655 million of the $3.7 bn for this project will be spent on such administrative costs. Disputes, like with the Hub's construction contractor Phoenix, are commonplace. It is difficult to write complete contracts that define the scope to last detail and capture all contingencies. The scope of work undergoes continuous changes at the different stages of execution for a variety of unforeseeable reasons. The best that can be done to mitigate this is too have in place enough flexibility within the contract to deal with such contingencies and attendance disputes, given the inevitability of it surfacing.

4. The emergent dynamics of such projects necessitate several decisions which are not easily justified on terms of objectivity. For example, from hindsight one gets the (mistaken) impression that in the Hub project, given the exorbitant increases in cost, there were occasions when the design could have been junked for a more prudent and financially viable one. But the reality is that the option value of shifting to a new design is most often zero, even negative, given the different types of sunk-costs associated with the original design. Or the decisions to agree for expensive sub-contracts to expedite the work, or the

This raises the question of how do public managers, especially in countries where post-construction audits are done with the apparent wisdom of hindsight, take decisions that do not fall foul with such auditors. This assumes great significance for India where audits-induced decision paralysis has become an important problem in recent years. In fact, a business as usual audit of this project in India could have incrimated all the concerned, including Mayor Bloomberg, of causing loss to public exchequer and even left many in jail. 

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