Australian Federal and State Governments need to engage project delivery partners from the private sector in order to avoid time and cost overruns on major public infrastructure projects.
Seemingly overnight Australia finds itself in the grip of a civil projects boom and the beginning of major sustaining capital and new mine development projects the major mining houses previously mothballed. Both will coincide simultaneously across both the East and West coasts of Australia creating a projects leadership talent drain that threatens the success of major public sector projects as talent is stretched thin.
The below graph illustrates the extent of the peak in the civil projects sector.
Add to this more than $8bn in already announced mining projects in WA (Rio Tinto, BHP and FMG), with more to come, and you begin to see the size of challenge facing project owners looking to source talent to setup and deliver their projects effectively throughout the medium term.
Excellent major project client-side risk, commercial and project management expertise will be in high demand over the next 7 years, and consequently scarce. This will leave governments to setup and steer their major projects with what limited available in house talent remains, unless innovation is taken now to traditional project delivery models.
Partnering more regularly with private enterprise to offer project delivery expertise, including, for example, engaging EPCM contractors as project delivery partners is one option that needs to be adopted by government more frequently to avoid poor project outcomes like those recently experienced on some major projects in Australia, where risks have been poorly managed.
EPCM stands for Engineering, Procurement and Construction Management.
The EPCM project delivery model is a common form of project delivery method used by project owners in the energy and resources sector to deliver major mining projects.
EPCM contractors specialise in project management, engineering, procurement and construction management of very large projects.
They act as the agent of the project owner (in this case the Government), are responsible for setting up the project (risk management, governance and management systems), designing (or managing the design) of the project works, tendering the works, evaluating the responses received from the market, and recommending award of contracts to various contractors/suppliers to perform the project.
Often the Owner (in this case Government) then enters into each contract with contractors/suppliers for the project directly. The EPCM Contractor then directly manages the performance of each separate contractor under each contract in accordance with the overall project budget and schedule as agent of the Owner, and as Superintendent under the contracts.
EPCMs are usually remunerated on a rates or cost reimbursable basis and a success fee or bonus structure exists to incentivise timely, on-budget, safe delivery of the project, as well as a subjective behavioural and performance based KPI scheme to punish or reward performance during the project’s delivery.
Contrast this with more traditional project delivery methods which see Government deal with project establishment, risk and design management itself or using seperate consultants for each, or look to totally outsource all design and construction risk to one contractor in the market, and the pitfalls are obvious. The EPCM model sees project setup, design, and risk management outsourced to an expert from the beginning to then recommend, in the best interests of the project, the best method for procuring each aspect of the works. The upside is that project risks can be more adeptly identified, managed and the job executed under closer, albeit outsourced, expert governance.
Most of the major EPCM contractor players are global organisations, some are headquartered in Australia, others overseas. Many have experience delivering trillions of dollars of complex infrastructure projects around the globe.
It is this accumulated corporate knowledge, structure, systems, experience and talent that is being acquired by a client when engaging an EPCM contractor to co-ordinate and supervise delivery of a mega project. Of course it comes at a cost, and like most service providers, each have their own strengths and weaknesses. In our experience, they must be selected and managed well by the client to ensure value for money outcomes are achieved. Control should be afforded but not be completely vested in the EPCM; a healthy degree of collaborative governance, co-location of teams within the owner’s organisation, excellent leadership culture and appropriate checks and balances are all necessary to fully unlock the upside of this delivery model, but Government could achieve this.
The benefit of partnering with private enterpise for project setup and governance is that workload is reduced for the project owner and the looming talent strain mentioned above ameliorated because EPCMs are in the business of attracting and retaining the best project delivery talent in the world, and deploying them to each project they are engaged on; Government is not.
The cost/benefit justification for delivering mega projects via this method becomes compelling if there is a lack of in-house client-side project management, design management, commercial and risk management talent during peak demand. This is because if one large project exceeds budget, is late, or fails to meet design requirements, the cost consequences can quickly run into billions of dollars of direct cost and many millions of dollars of indirect loss in the form of business interruption suffered by those who depend on the infrastructure to come online. Every dollar overrun on large projects, is a dollar not available to spend on competing civic needs such as a education, hospitals, social welfare or government stimulus of industry.
The concept is not without precedent.
A project delivery partner model is in fact being used to deliver Sydney’s second airport, Badgerys Creek. International US based EPCM Contractor, Bechtel, has been appointed as project delivery partner to steer delivery of that project.
More of this should occur for complex, high value projects, however there must be an imperative placed on the EPCM contractors/delivery partners that are selected, to use local talent to deliver the project where available, and to train local talent, as opposed to importing foreign nationals from within their business. It is important that where taxpayer funds are used, Australia receives the long term benefit of building out intellectual capital within Australia.
If the above is done, Government will not be caught short on experience to deliver the ambitious forward program of major projects, and we will go some of the way towards seeing less project cost overruns, less late delivery and a positive legacy of experienced project delivery professionals will be developed in Australia to cater for the continual demand experienced for new infrastructure and infrastructure renewal in our fantastic country.
The remaining challenges include:
- Ensuring sufficient time is spent designing and managing risk in major project setup phases (as opposed to being driven by election cycles)
- Finding enough available contractors with sufficient expertise and capacity to build the projects (there are only a few major contractors left in Australia, and many are commonly owned at the parent level)
- Achieving sufficient competitive pricing tension in a hot market, to ensure value for money for Australian taxpayers