April 18, 2022
The hosting of an Olympic & Paralympic Games is notoriously expensive. So much so that a paper published by the University of Oxford[1] in 2021 found that every single Olympics (Summer and Winter Games) ran over budget.
Host countries (which face an immovable deadline – the commencement of the Games) are not often afforded the same “luxuries” in terms of techniques to manage and minimise cost overruns, that are available to parties engaged in other major infrastructure projects.
This article will identify some of the risks in major projects that cause budget blowout and some systems that can be implemented to manage those risks.
Olympic & Paralympic Games
Holding the Olympics is often seen by the Host country as a golden opportunity for its economy. However, that is not always the case due to the ongoing risk of significant cost overruns. For example, the $360M initial budget for the 1976 Montreal Games skyrocketed to a staggering $1.6bn and left the city in debt until 2006.
The considerable costs expended by Host countries for the Games can be attributed to (amongst others) the requirement of the Host country to guarantee any cost overruns of the Games. As observed by the Oxford University paper, the ‘Olympic costs are subject to infinite means and variance, with dire consequences for predictability and planning’, as the Host country must expend whatever it takes to ensure the on-time (and complete) delivery of the Games. The Opening Ceremony cannot be moved, meaning there can be no trade-off between the delivery program and the costs (which is often available on other major projects) – this leaves little room for negotiation of prices with vendors and delivery partners when issues or delays arise (which they undoubtedly will).
Preventing Cost Overruns
Whilst there are issues beyond the parties’ control which can inevitably cause blowouts in project budgets (most recently and significantly, the COVID19 pandemic), there are many causes which are in the hands of the parties and can be easily managed through simple changes at the commencement, and throughout, the project.
Some strategies which parties may consider implementing in their major projects are outlined below.
- Appropriate Estimates – Submitting an inappropriately prepared (and therefore, likely inadequate) estimate, will almost certainly lead to cost overruns. This often arises where a party has significantly underestimated the costs associated with the project – unintentionally, due to a poor understanding of the complexities or scope, or intentionally, to appear competitive in a tender process or undercut the other tenderers. Either way, this will likely result in significant cost overruns. In other words, if it seems too good to be true, it probably is.
Whilst the parties may be eager to commence the project, taking the time to appropriately prepare (and assess) a project budget / estimate, may pay-off (quite literally) at the conclusion of the project. As such, parties should avoid applying a “one size fits all” approach to its estimate / budget, as this is unlikely to ever be the case. Instead, parties should carefully and meticulously consider the scope and all available information for the project to ensure it is appropriately, realistically, and accurately priced and resourced. In doing this, the parties may consider engaging an independent advisor to assess and verify the suitability of the budget / estimate.
- Risk Allocation – Failing to appropriately assess (and make allowances for) risks that can cause delay (when those risks invariable arise), will necessarily cause cost overruns to the project.
Whilst a particular contractor, subcontractor, or vendor, may be the most competitive, the engaging party should always ensure it conducts due diligence to verify that the party being engaged has the appropriate skill and expertise for the project. Failure to engage in this process can significantly (and unnecessarily) contribute to cost overruns, as inexperienced or inappropriate parties can cause costly mistakes, delays, and errors.
- Appropriate Contract & Construction Documents – Inappropriate contracting and construction documents for a project can cause significant, lengthy, and costly issues throughout the delivery of a project.
Investing in the preparation of a complete, accurate, and appropriate contract and set of constructions documents at the outset (including designs, current site information, and technical specifications), will manage the parties’ expectations, identify the risk allocation (including for delays, variations, and other issues occurring over the course of the project), and provide a useful tool for managing issues and disputes, should they arise. Further, it will assist the contractor in fully understanding the scope of works required (and allow it to clarify any ambiguities pre-contract), which will in turn, will assist it in preparing an accurate and suitable budget / estimate and program for completion of the project.
- Pre-empting Changes in Scope (& Pricing) – Changes in scope or variations (no matter how small) and cost escalations (particularly in the current climate) are inevitable and often costly. Unforeseen variations will be particularly apparent in projects with a poorly defined scope or poor technical specification.
Prior to entry into the contract, the parties should closely assess the project requirements, technical specification, and other available information to ensure its priced scope is understood between the parties. Further, the parties should ensure the contractual documents contain a clear process for variations and price escalations (including the process, pricing of, and entitlements of the parties). Despite employing these safeguards, issues may still arise. As such, the parties may consider making allowances for cost (and time) for any “surprises” which may arise (including cost escalations, change in personnel, increases in material costs, and labour shortages).
- Avoiding Design Errors – In line with item 4, poorly designed, inaccurate, or incomplete drawings can also significantly impact the cost (and time) of delivering a project. Further costs can arise during the construction phase due to defect rectification, omissions or errors in design, mistakes in fabrication, and revisions requested by the principal.
To avoid these types of errors, it is critical that both parties thoroughly understand the role that each has in the project, and the associated scope of works.
- Accurate Scheduling – Time is money, meaning a failure to understand the scope of a project which necessarily leads to inadequate scheduling for completion, will cause delay to the project and subsequently result in an increased overall cost (particularly in circumstances where the contractor will be obliged to pay liquidated damages for late completion, or where it must accelerate on its own account).
Ensuring the project scope is clear, accurate and understood at the commencement of a project, will allow a party to prepare an accurate schedule for the delivery of the project, and will ultimately afford that party more flexibility to overcome unexpected issues throughout the project.
- Tracking Project Expenditure – Recording (and monitoring) the project’s expenditure in real time will reveal early signs of overruns (which allows the project manager to rectify any issues before they arise) and will minimise expenditure “surprises” at the conclusion of the project.
- Clear Roles & Responsibilities – Clearly defining roles and responsibilities of all personnel in the project (utilising organisation charts and job descriptions) will minimise the likelihood of tasks being completed more than once, subsequently preventing lost and wasted productivity.
- Appropriate Use of Technology – Effective use of technology by managers and site personnel will increase efficiency and minimise errors in the works. Technology can assist in all areas of the project, including invoicing, tracking deliveries, maintaining project documents, communication, and site-based programs which can make tasks easier and calculations (for example) more reliable.
- Avoiding Disputes – Whilst easier said than done, disputes occurring during projects are a major contributor of cost overruns, and should be avoided (where possible). One strategy to aid in avoiding dispute is to ensure the contract is complete and unambiguous, and contains clear processes for claiming variations, delays, and making other contractual claims, and contains an appropriate dispute resolution clause. The inclusion of these processes will ensure the continued progression of the project, and will minimise additional expenditure as a result of the dispute.
An initial outlay that sets the project up for success from the outset will save both parties in the long-run and prevent cost overruns over the life of the project.
Lamont Project & Construction Lawyers
Our Team have the industry knowledge and experience to assist both Principals and Contractors in contract development and amendments, and major project delivery. If you would like to discuss any matters raised in the above article or the forthcoming series as it relates to your specific circumstances, please contact Lamont Project & Construction Lawyers.
The contents of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.
Contact: Peter Lamont or Lili Hoelscher
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[1] Bent Flyvbjerg, Alexander Budzier, and Daniel Lunn, ‘Regression to the Tail: Why the Olympics Blow Up’ (2021) 53(2) EPA: Economy and Space 233.