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RESEARCH AND THOUGHT LEADERSHIP

Determinants of Project Performance in the Russian Construction Industry: A Strategic Project Management Perspective

Poor project performance is an ongoing problem in the Russian construction industry, and more generally on a worldwide scale. The root causes of poor performance in construction projects have been researched extensively in many other markets. However, to our knowledge, there has been no research to date to investigate the causes of poor performance in the Russian construction industry, a market plagued with excessive project delays and budget overruns. In order to understand the drivers of poor project performance in the Russian construction industry, a survey was conducted among contractors and construction management firms covering a wide range of potential determinants of project performance. The survey covered three major areas that potentially affect construction project performance: 1) External and internal environments of the project, 2) Project execution strategy development (planning), and 3) Strategy implementation. Our preliminary results showed that the determinants of poor performance concentrated in two areas: (1) project planning; and (2) execution governance. The main drivers of poor performance in project planning were scope definition, sufficient technical plans and specifications at the outset, identification of project risks, and allocation of obligations among parties. Similarly, the main drivers in execution governance were effectiveness of responsibility structures, operating procedures, reward structures and dispute resolution processes. These findings show that, in a market where projects are typically fast tracked with negligible front-end preparation, contracts are signed with minimal design documentation and insufficient project governance systems are put in place for the project execution. As a result, owners may be paying too great a price in the long term for the perceived benefits of the fast track approach.

 

DETERMINANTS OF CONSTRUCTION PROJECT PERFORMANCE IN THE RUSSIAN CONSTRUCTION INDUSTRY: A STRATEGIC PROJECT MANAGEMENT PERSPECTIVE


by

B. Kagan Ceylan, Dr.Eng., MRICS, PMP, LEED AP+, BREEAM Int. Assessor 

(Original of this article was published in June 2010 issue of Performance - Ernst & Young’s Global Business Think Tank. CLICK HERE TO GO TO THIS PUBLISHED ARTICLE.)

 

Introduction 

Real estate development projects in the Russian construction industry consistently struggle with budget and schedule overruns. Budget overruns degrade project value, while schedule overruns delay the time to market. Both result in increased overhead and higher financing costs, as well as lost revenues that further reduce a project’s value. These performance problems also strain the relationships between developers and contractors, which can result in protracted contractual disputes. In the case of market cycles, failure to complete the project during a rising real estate market may doom a project to failure that would otherwise be successful. Besides threatening the commercial viability of individual projects, budget and schedule overruns may also affect shareholder values negatively for publicly traded development companies. Despite these well known consequences of poor budget and schedule management in construction development projects, such performance problems in the Russian construction industry have been the norm rather than an exception.

In the wake of the real estate crisis that has deeply changed the Russian construction industry environment, the need for improved governance in construction projects to control project budget and schedule overruns is now more pressing than ever. The times have come to an end that were characterized by returns on investment at record levels, and seemingly never ending demand for new real estate space, that easily absorbed project delays and budget overruns. The significantly reduced return on investment of real estate development projects, coupled with increasingly competitive and stringent funding opportunities, make it essential for construction projects to stay on budget and time. As a result, in this new industry environment improved project governance systems are increasingly a requirement for real estate development projects rather than an option. However, despite this need for effective project governance systems, even the root causes of poor performance have been obscured and unaddressed, and dealing with them is typically left to the gut feeling of the project managers.   

Performance problems in construction development projects are not unique to the Russian construction industry. A study in 1987 that investigated cost overruns in civil engineering projects across the globe found that budget overruns typically vary from %30 to as high as %250 with hardly any reports showing underruns. Another report states that close to 40% of large engineering projects researched on a worldwide basis experienced serious performance problems ($985 million average cost) (Miller and Lessard, 2001). As a result, researchers made various efforts to identify the root causes of performance problems in construction projects across the globe.

Performance Problems - Construction in Russia

Are some construction projects more likely to experience performance problems than others? If so, how can this tendency be identified early in the development cycle and addressed in order to prevent or minimize poor performance? In order to determine the root causes of widespread performance problems in the Russian construction industry, a research study was carried out based on the input of practitioners from a range of construction projects. In this research, our first objective was to identify the major determinants of construction project success at the macro level for budget and schedule performance, the two most important criteria for both developers and contractors. Our second objective was to develop an indicator to predict the likelihood of budget and schedule overruns early in the development life cycle, if possible, prior to the beginning of construction; and to be able to identify those areas that need improvement for project success, again at the macro level. Our final objective was to provide insight about the impact of alignment between the owner and contractors at the micro level and provide some suggestions about the effect of this alignment on project performance. Here we report some of the early results of our research to reach these goals, and present preliminary findings and their implications for the current construction market in Russia. Although, these results are based on data collected from the Russian construction industry environment, we believe that they provide useful insights for other countries as well, since many characteristics of construction projects are similar across the globe.

Determinants of Project Performance

Any construction project starts with a business case and experts design a solution, define work packages, and select contractors using bidding processes. Selection of the best project strategy is an integral part of this process to maximize the project value in terms of cost, time and quality, while achieving the owner’s business goals. The scope of the selected strategy also reflects the extent of the owner’s and contractor’s planned and present interactions within the project environment. 

Organization theory and strategic management literature indicate that environment-strategy-performance alignment consists of both internal and external linkages of an organization. It further identifies key perspectives of strategic alignment between environment and performance, based on whether the elements to be aligned are: (a) internal to the firm (i.e. the fit between strategy and organizational structure where the focus is on the implementation of strategy); (b) external to the firm (i.e. the fit between the firm’s strategy and its environment where the nucleus is strategy formulation), or (c) an integrated combination wherein the formulation and implementation are considered to be interactive elements (Ventkatraman and Camillus, 1984).

Our departure point in the present study was to apply the above described basic concepts in organization and management science, and project management theory (Duncan, 1972; Diekman and Girard, 1995; Lawrence and Lorsch, 1967) , to the local market conditions. Based on these bodies of knowledge and with the input of construction project management practitioners, we tried to identify the right set of potential performance determinants, and select those that really impact project performance within the context of the Russian construction environment. As a result of our review, we hypothesized that construction project performance is determined by the following key factors.

- the external project environment (e.g., regulatory, economic, cultural, social environment in which the project takes place)

- interaction of the project organizations (e.g., the owner and the contractor’s project team) with this external project environment

- strengths and weaknesses of the project organization, which constitute the internal environment of the project team (e.g., experience and educational level, financial strength of the owner and the contractor, effective business practices)

- characteristics of the projects (e.g., design and construction complexity)

- strengths and weaknesses of the internal operating procedures with which the project organization executes the project (e.g., dispute resolution processes)

- the effectiveness and completeness of the planning process prior to the construction (e.g., technical, financial, organizational, operational). 

In order to determine the correlations between the project performance and the determinants of each key factor identified above, we conducted a survey consisting of 31 questions; each measuring the impact of a different determinant on a scale of 1 to 5. The correlations between these determinants and the degree of schedule and budget overruns were then measured as shown below, in order to identify those determinants that played a key role in poor project performance. Our survey is partially based on past research in this area (Diekmann and Girard, 1995)] with extentions based on the organizational and strategic management theories.

Click below for Figure 1. Performance determinant categories identified within the strategic management framework

Correlations of Determinants and Budget and Schedule Overruns

External Project Environment 

The only budget performance determinant from the external project environment category appeared to be the complexity due to the number of parties involved in the project’s execution (Figure 2). Understandably, the number of parties (regulatory bodies, agencies, organizations assigned for specific responsibilities, and various independent consultants) appears to impact negatively the project performance. The complex regulatory environment in the Russian construction industry appears to be a main factor complicating these relationships.

Click below for Figure 2. Effect of complexity due to number of parties involved in the project on project budget and schedule overruns

Project Planning

According to our classification, the highest number of significant performance determinants was related to project planning and pre-project preparation activities. The project planning activities that most impacted budget overruns were the following:

  • adequacy of scope definition (Figure 3)
  • sound technical plans and specifications (Figure 4)
  • defining realistic obligations for the parties (Figure 5)
  • assigning realistic obligations to the parties prior to project execution (Figure 5)

Click below for Figure 3. Correlation between scope definition and budget and schedule overruns

Click below for Figure 4. Correlation between adequacy of technical plans/specs and budget and schedule overruns

Click below for Figure 5. Correlation between risk identification/allocation and budget and schedule overruns

Project Execution 

Besides the project planning category, the project execution category also contained a high number of determinants. These included:

  • the responsibility structures of the owner and the contractor (Figure 6)
  • effectiveness of operating procedures for the execution of the project (Figure 7)
  • reward structures (motivation) within the project teams
  • effectiveness of formal dispute resolution systems during the project execution (Figure 8).

Click below for Figure 6. Correlation between owner’s/contractor’s responsibility structures and budget and schedule overruns

Click below for Figure 7. Correlation between operating procedures and budget and schedule overruns

Click below for Figure 8. Correlation between formal dispute resolution processes and budget and schedule overruns 

Owner-Contractor Alignment and Its Impact on Potential for Project Disputes

While the above described framework analyzes the relationship of each performance determinant within the project execution lifecycle, it lumps the owner and contractor teams into one project organization and does not take into account the possible diversions between the owner and the contractor. In order to investigate the potential impact of owner-contractor alignment on the project performance, for one of the industrial projects we surveyed we collected the opinions of the owner and contractor representatives on the same determinants independently of each other. With the help of this information, we first extended our analysis by applying a well known dispute prediction model (Dispute Performance Index - DPI) to predict whether a project is prone to disputes (Diekmann and Girard, 1995). Finally, we further investigated the possible reasons for the poor project performance, including the liklihood of project disputes based on the actual data collected.

The Dispute Performance Index (DPI) predicts construction project performance and its sensitivity to disputes on a scale from 0% to 100% (Figure 9). The higher the value of DPI, the less likely are contract disputes. For example, based on past construction project performance, DPI estimates higher than 80% have a 70% chance of avoiding disputes. On the other hand, projects whose DPI is less than 20 have only a 6% chance of experiencing good dispute performance. The scale of the DIP showing the scores and the project performance is shown below. The project specific DPI is estimated as a statistical result from the series of questions, which were covered in our survey.

Click below for Figure 9. DPI predictions vs. project performance

The Dispute Potential Index (DPI) of the case study project was calculated as 11% based on the average values of the responses to each question. The scores in each category are shown below together with a sample of “good” project scores for comparison purposes (Table 1). From the scoring graph on the preceding page, the calculated DPI of 11% puts the subject in the lowest category for this type survey and indicates there is some 48% chance that the parties will experience more “disputes” than a project that scores average on this scale. Disputes are defined as any contract question or controversy that must be settled beyond the jobsite management staff.

Click below for Table 1. Dispute Performance Index calculated for Case Study Project

The 11% DPI calculated based on the responses obtained from the owner and the contractor in our sample case eventually proved to be an accurate prediction. Following our assessment, the owner and contractor cancelled the construction contract, although the dispute was eventually resolved without litigation. As may be expected, this outcome was also accompanied by relatively poor project performance in terms of schedule and budget overruns.

The survey also revealed striking observations about the poor alignment between the owner and the contractor and the potential impact on the project performance. The survey revealed that the owner and the contractor significantly disagreed on various important aspects of the project, as shown in the figure below covering each group of determinants and the project execution lifecycle from Figure 1 above. It appears that in this case, the poor alignment among the project strategy, structure and environment was amplified by the lack of alignment between the owner and the contractor (Figure 10).

Click below for Figure 10. Owner-contractor divergence in opinion on some key determinants of the project peformance 

Conclusions on Performance Determinants - Russian Construction Industry 

Based on the surveys we conducted, preliminary findings indicate the need for “starting right, in order to finish right” in Russian construction development projects. It is noteworthy that the majority of significant performance determinants accumulated in the project planning and execution categories. The poor project planning aspects that impact project performance the most include inadequacy of scope definition, not having technical plans and specifications prior to the start of construction, insufficient identification of project risks and allocation of obligations among the parties. These results indicate that those projects that experience performance problems are those that do not start with the appropriate pre-project plans, both from the technical and organizational perspectives.

Similarly, the relatively high concentration of significant determinants in the project execution category (effectiveness of responsibility structures, operating procedures, reward structures and dispute resolution processes) indicates that project teams are suffering from lack of the necessary project execution mechanisms and governance systems, which in turn adversely impacts project performance.

When the impact on budget performance was reviewed, the overruns were relatively constrained at the range of 30% for the worst performing project. This may be due to the fact that most construction projects are executed on a lump sum basis and, unlike schedules, contract budgets can be suppressed more easily by various means: such as reduced quality of works, optimization of construction operations, and reduced profit margins of contractors. The impact of the determinants of schedule overruns was much higher and typically reached or exceeded 60% of the initially planned project durations. This implies that significant amounts of costs are incurred indirectly through lost revenues, increased overheads and possibly disputes and other inefficiencies between the owners and the contractors as a result of such long schedule delays. 

In a market, in which projects are typically carried out fast-track with minimal front end preparation, contracts are put into place as soon as minimal concept design documentation is approved, and project planning and execution mechanisms are typically intensified afterwards in the form of fire fighting: it appears that there is a need for a paradigm shift in the planning and execution phases. The apparent advantages of early commencement of construction development projects (e.g., driven by the assumed shorter times to market) should be much more carefully evaluated; possibly with quantitative and structured methods as opposed to the gut-feeling of the decision makers as it has been during the boom times. The potential costs of the current approach are most often indirect and significant. This need for improved project preparation and control is further amplified by the post-crisis construction industry environment that is expected to be more competitive than ever and subject to more stringent regulation, which in turn require improved project development governance systems for the real estate development investments to be viable.

Finally, our investigations also revealed that poor alignment between the owner and the contractor can further intensify and expand the project performance problems. While the need for effective alignment between the owner and the contractor is valid for all markets, in the Russian market that is typically characterized with high levels of uncertainty and risk, poor alignment polarizes the parties creating a divergence between them as to the project’s goals and makes them more protective of their own individual interests in the face of project challenges that should better be encountered with cooperation. This can create a vicious cycle that may eventually cause the failure of the overall project organization.

 

References:

Diekmann and Gerard (1995). “Are contract disputes predictable?”, Journal of Construction Engineering and Management, ASCE, December 1995, p.355-363

Duncan, R.B. (1972). “Characteristics of organizational environments and perceived environment uncertainty”, Administrative Science Quarterly, 17, pp.409-443

Lawrence, P. and J. Lorsch (1967). Organizational Strategy, Structure, and Process. McGraw-Hill, New York

Miller and Lessard, “The Management of Large Engineering Projects”, MIT Press, 2001 

Venkatraman N. and J.E. Prescott (1990). “Environment-strategy coalignment: An empirical test of its performance implications”, Strategic Management Journal, 11, pp.1-23

 

Figure 1. Performance determinant categories identified
Figure 2. Effect of complexity on project budget and schedule due to number of parties involved
Figure 3. Correlation between scope definition and budget-schedule overruns
Figure 4. Correlation between adequacy of technical plans-specs and budget-schedule overruns
Figure 5. Correlation between risk identification-allocation and budget-schedule overruns
Figure 6. Correlation between owner-contractor responsibility structures and budget-schedule overruns
Figure 7. Correlation between operating procedures and budget-schedule overruns
Figure 8. Correlation between formal dispute resolution processes and budget-schedule overruns
Figure 9. Dispute Potential Index (DPI) predictions vs. project performance
Table 1. Dispute Performance Index calculated for Case Study Project
Figure 10. Owner-contractor divergence in opinion on key project performance determinants

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