Project risk: don’t slip up on big deals28 November 2008
With a chill wind blowing across the economies of Europe – and with the construction industry rolling to a halt in some countries – many integrators must be hoping for a ‘big deal’. After all, it could take only one big on-going project to keep a whole raft of contractors afloat until sunnier times.
But be careful what you wish for. The day a company lands its biggest-ever contract will also be the day it commits every part of its operation to what could turn out to be destruction testing. From the on-going lines of credit needed to secure equipment to perhaps uncalculated resources to obtain the final sign-off, the contractor is likely to find itself stretched in a way that has never happened before.
The purpose of this article is to identify the sources of risk to an integrator, the points at which they can occur in a contractual cycle and the steps that can be taken to minimise risk.
Skills and experience
Blair Parkin is managing director and co-founder of Visual Acuity, a technology consulting and project management firm established in 2002. Its headquarters are in Brighton, England, with offices in Bergen, Norway and San Francisco. Co-founder Hugh Creal was formerly with PricewaterhouseCoopers Consulting. Parkin, on the other hand, had 20 years’ project and technology experience in AV, computing and visualisation.
"The current team of consultants have all come from the world of designing and building large and integrated systems," Parkin offers. "The skills necessary to manage large projects came initially from the previous experiences of the individual team members working on such projects as the Rose Center for Earth and Space at the American Museum of Natural History and a whole host of visualisation centres in the oil and gas industry in Europe, the Middle East and Africa."
Visual Acuity has managed several very large-scale projects. This includes the foundation of the Hellenic World’s culture centre in Athens, with its exhibit gallery, 130-seat interactive 3D dome theatre and 1,100-seat theatrical venue, as well as interactive classrooms and meeting spaces.
"To focus the right expertise on each project, Visual Acuity has two practice areas and does not stray into work outside of these," Parkin explains. Once of these is public spaces, specialising in museums, planetariums, aquariums, science centres and heritage projects. The other is visualisation, consulting on design visualisation, data visualisation, virtual reality and 3D media."
So, what are the key points that Visual Acuity needs to know before assessing a project? "Visual Acuity uses a proprietary analysis and scoping procedure called the P Factors process," Parkin reveals. "This is done in workshop form, with key stakeholders, and seeks to identify the main elements of the project. Key P factors include, project outline, purpose of project, phases, products, and so on."
According to Parkin, the most significant areas of risk vary from case to case. "This is dependent on the project; for instance doing things that have not been done before creates technical risk," he says, pointing to projects where the technologies used had not been integrated before. Clearly, this could represent a considerable risk, even at the most basic level of the design not working as envisaged.
"However, these kinds of risks can be managed with good design, evaluation and prototyping – so the main and perennial risks remain time and budget," he adds. "Time and budget risks come down to proper project management and wise purchasing."
The most obvious way of overcoming the risk presented by overruns is a penalty clause – but it’s not necessarily the most effective, according to Roland Hemming, who provides business consultancy services for the audio industry and has worked on numerous large-scale projects, covering subjects including project risk. He was head of sound on the original Millennium Dome and, although the project was mired in controversy, it certainly wasn’t because of the sound system.
Millennia and milestones
"Our risk was our deadline," says Hemming of the Dome project. "As head of sound I couldn’t have a situation where the sound wasn’t ready but I could go to my boss to say, ‘don’t worry, there’s loads of people we can sue’. So the contracts had no penalty clauses for late delivery, because what’s the point in suing someone afterwards, when it’s all gone wrong?"
Instead, the contracts were designed to compel the suppliers to communicate to the client any reason they knew that might delay delivery. "If they failed to communicate any problem, they were in breach and we could get rid of them," says Hemming. He admits that this sometimes resulted in rather more detail about minor delays than strictly necessary but it put him in control of the situation, which was the key objective.
"It was their failure to communicate that put them in breach, not their failure to deliver – and therefore you could identify problems much sooner," he emphasises. "Normally if things don’t show up you only find out on the day they were due and you go: where are they? ‘Oh yeah, we meant to tell you,’ isn’t a response that helps you at that point."
Parkin points to a fixation with price alone as a potential area of risk. "Visual Acuity does not support lowest-price tendering exercises," he reveals. "We prefer to create a dual-requirement specification and technical specification – with both the requirements and technical specifications having measurable and quantifiable criteria. This ensures that what a vendor/integrator is proposing to deliver also meets the needs and is not just a list of equipment sold at the lowest price.
"Careful development of evaluation criteria is a vital part of what Visual Acuity does on every project," Parkin adds.
But equipment suppliers are by no means the only source of exposure for a contractor. If the project is abnormally large, there is a probability that untried subcontractors will enter the equation.
Hemming advises that clear communication at the start of a project is vital. While he is meticulous when working with new contractors, he observes that every project is different and so meetings remain important, however familiar team members may be.
"I work with a lot of people who I know very well and have very good relationships with," says Hemming. "I would consider them as friends. However, before every project I will have a businesslike meeting with them, no matter how close our relationship, setting out clearly what I’m expecting them to do, and what they should expect from me. I think so often those things just aren’t communicated."
Hemming agrees that it can seem strange setting out new working relationships with trusted partners of old, but says: "There’s better co-operation and I’d rather have some awkward conversations at the beginning of the project than towards the end, when time is short, money’s short and clearly there’s a lot of acrimony."
"Risk takes many forms, from the capacity of the client to pay, to health and safety, environmental impact and a multitude of other issues that might affect employees or other contractors," comments Hugo Roche, managing director of installer Sysco. "It is increasingly important to undertake a full project risk assessment and this is something we find ourselves spending ever greater amounts of time on before accepting a bid opportunity.
"The principal risks we focus on are design risk – has the client accurately identified what they want to achieve?; financial risk – can the client afford the bill for our services?; health and safety risk – are there any excessive health and safety risks that we cannot fully protect ourselves against?; and timing risk – can the job be done in the time available? Having looked at each of these we form an opinion as to the viability of the project and whether it is something we feel comfortable being involved with."
There is no doubt that assessing and controlling risk is important, but the underlying theme here is that it is better to lay the foundations and milestones that help to avoid risk by making the project a success.
"People incorrectly think of risk as something they can pass on to someone else – a bit like playing ‘it’ in the playground, so ‘you’ve got it now instead’," Hemming cautions. "What you find on projects is that contracts will be issued by the client, who will pass the risk to the main contractor – and that’s being passed on to sub-contractors, who then pass it on to sub-subcontractors.
"They all think they’re passing that risk on, but they’re not. You’re passing it on to increasingly volatile organisations that – as you go further down the chain – are less likely to be able to deal with the risk." To put it another way, the danger is that if the project goes sour, the debt has been distributed among the organisations in the hierarchy least able to cope with it. But it runs deeper than that.
"The client can think that, just because they’ve got a nice big fat contract, they’ve somehow got rid of their risk," says Hemming. "At the end of the day, if the building isn’t complete, they’re at risk because – no matter what words you’ve got on a piece of paper – they’re the ones without a business, or a venue, or an event."
So much for the risk to the client: let’s refocus on the risk to the contractors, who may find themselves at the end of a chain and horribly exposed through no direct fault of their own. As often as not, it’s not a client going bust that brings a contractor down, but a dispute that drags on until it sucks all the cash out of the business.
"You’re normally selling on a lot of goods, and therefore the risk if a project goes wrong and you don’t get paid is extremely high," Hemming observes. He cites the case of UK contractor Glantree, which went out of business around eight years ago despite having £5million on its order books.
The message is: cash is king. Without it, any business can fail, no matter how large its order book. One obvious way a business can bleed cash is by having to pay for equipment or other materials faster than it is getting paid – so a properly documented schedule of works and payments is essential. Another way a company can run out of operating capital is by becoming embroiled in contractual disputes that take unforeseen and unbudgeted amounts of resource to resolve.
A contractor, which Hemming won’t name, went to the wall trying to fix problems on a contract, at a cost of £100,000. "But it was 100,000 real pounds, real cash flow," he says.
"The majority of our work is UK-based, but when working overseas we pay particular attention to the financial risks," Sysco’s Roche says. "We have also been asked to work in some territories where we have had to provide additional security arrangements for our engineers. This can be very costly and needs to be factored in at an early stage."
Hemming emphasises the importance of keeping accurate records and documenting every significant stage of the process with the client. This goes beyond recording what has already happened to include issuing an early-warning notice to the client if a change is likely to materially affect the outcome of the project.
But none of this will protect a contractor from the damage that can be inflicted by submitting a tender that is unrealistically low, or from contracts that are so severe any profit is eaten up by penalties. This is one reason why Visual Acuity’s Parkin says the company does not support lowest-price tendering. Hemming also warns of the dangers.
"I think sometimes people – particularly in times of economic crisis – just aren’t prepared to walk away from a project. And they get themselves in trouble, because the terms weren’t right in the first place, they didn’t think about it: the deadline was unrealistic or something."
There are times, Hemming suggests, when the answer to ‘do you want the job?’ should be a straightforward ‘no’. He offers one final piece of advice: "You have to take a step back and look at everything that’s going on, and not just worry about will the programming work, or the speakers. It’s not about the individual details, it’s about taking an overall look at the project."
Roche agrees, saying it’s about "care and attention to detail. It is easy to get over-excited by the prospect of an order and forget the reasons for being in business in the first place."
Roland Hemming is set to host a session on managing large audio projects at the forthcoming ISE 2009 in Amsterdam in early February.