Should infrastructure decisions be constrained by the budget?

budget-constrainedThis post by Mark Neasbey, a director in the Australian Centre of Value Management is the first of four that looks into the role of the budget in infrastructure decision making. 

We are about to undertake a capital project for which we need a planning budget. We have chosen a figure that we think is affordable and justifiable and off we go with planning. We employ architects, engineers, cost planners and other specialists to work up a proposal.  They’re all qualified experts so we can rely upon their advice to give us a value for money solution.  Right?

But now we strike a problem.  To some the capital project’s budget figure becomes the target to realise and push beyond, because once the decision-makers see the brilliance and worth of the proposal they’ll get the extra money – that way we don’t have to compromise on anything!  Right?

For others, it’s the opposite – a barrier that must not be exceeded – the limit that has to be imposed irrespective of what compromises must be made.  We simply cannot afford to pay any more.  This is because no capital project should be seen in isolation of the whole business.  The organisation’s other priorities will also need to be appreciated so the best overall outcomes can be realised.

Both attitudes have some merit.

Our question today is:  How can they be reconciled?

6 Thoughts on “Should infrastructure decisions be constrained by the budget?

  1. Now we’re talking! This post highlights the fundamental challenge for traditional infrastructure AM: we’re unable to reconcile the inherent ‘value’ of a project (what we determine we need / want) with the ‘money’ we’ve got.

    The barrier to this reconciliation is our language and the thinking that underpins it. IIMM (s.1.3.1) defines the ‘infrastructure AM goal’ as being to meet a ‘required’ level of service in the most cost effective manner. So our focus is the ‘required LoS’… but if the cost of meeting this exceeds our budget, we have a backlog (of unfunded renewals and new projects). The focal point of our conversation is the backlog.

    The language and thinking underpinning it in ISO 55k are fundamentally different. I suggest it’s best to think of it as an ONGOING CONVERSATION between government and community that takes the form of a STORY:
    1. this is where we’ve come from
    2. this is where we are now
    3. this is where we’re headed (with the money we’ve got – what we can afford to do)
    4. this is where we want/need to be (this may exceed the money we’ve got)

    The focal point of the conversation is the question: ARE WE REALISING THE BEST POSSIBLE VALUE? If the answer is no, then we can modify points 3 (increase the money) and/or 4 (the outcomes we need/want)… and so we reconcile ‘value’ and ‘money’ (whilst maintaining a ‘tension in the story’ between points 3 and 4). This isn’t just about infrastructure, but ALL council activities (here I disagree with ISO 55k: it’s about realising value from ALL organisational activities, not just managing assets!).

    The list of ‘backlog’ projects (renewals+new assets) is still vital: it provides a tangible picture of needs/wants (#4)… but I suggest the only projects on the list that should be counted as BACKLOG are those we NEED to undertake to address an unacceptably high residual RISK (as assessed under council’s risk management framework: the ones demanding immediate action). Otherwise, the list is simply projects we WANT to do, but can’t afford with the money we’ve got available (#3).

    In a forthcoming paper (Adding Value to our Vocabulary) I hope to convince people of the significance of this change of thinking which provides STRATEGIC CONTEXT FOR OUR DECISIONS. Happily, this thinking is embedded in the brand new NSW Local Government Act: councils must carry out their functions in a way that PROVIDES THE BEST POSSIBLE VALUE (NB: this will inform the ‘required LoS’: the thinking in IIMM, the IAM goal, needs to be understood within this broader context).

    I’d love to hear people’s thoughts… particularly those who disagree!

  2. Patrick Whelan on September 19, 2016 at 3:23 pm said:

    As a former asset planner, I can avow that in government terms, the amount the government agrees to invest is the project budget, not to be exceeded. Every attempt was made to make the project budget as realistic and robust as possible.

    There is a life principle that can turn budgets on their heads: “It is easier to ask forgiveness than permission.” Governments do their best to make sure the amount they invest up front isn’t exceeded. That is often not easy, as agency scope creep adds in ways often not understood by the project manager. In theory, a project can’t go to documentation if the principles and logic underpinning the business case are no longer valid. Such validity is usually picked up by an inflated cost plan. While I know of instances where at this stage a project has been returned to us planners, an awful lot of project cost plans are fudged to allow the project to go forward.

    As a former asset planner in the state government, I’m not sure the two attitudes Mark speaks of can be reconciled, but they will forever coexist, however uneasily,

    I have to agree with Ben on the backlog. When a planner, I only once worked on a project that wasn’t really needed. At the time, we thought it necessary, but it turned out otherwise. Every other project was necessary for service delivery, but very few were funded. That is the backlog, caused entirely by the big picture encompassed in the state budget.

    • Patrick, a good summary of the current state of play. I would add that there are tricks that proposal writers play – like leaving out an essential construction element (a safety feature for example) – so that the initial cost is within budget and the project gets the go-ahead, only to have to be amended later at greater cost.
      The question I would like people to consider, however, is whether we have to accept the current state of play as the only possible way forward. Can we find a ‘middle way’ that avoids over-expenditure to the detriment of other budget items and that also avoids the under-expenditure that ends up with a loss of community service through compromise? If there was such a way, what might it look like?

  3. Wesam Beitelmal on September 26, 2016 at 11:39 pm said:

    Great post and comments!
    I would like to emphasize the question that Penny raises. I think the gap–difference in time–between planning and decision making about projects and some time programs make a huge difference in the cost (estimated and needed on time of execution).
    Including and using risk and risk modeling (e.g. Monte Carlo simulations), will decrease these gaps and provide more realistic to the estimations. Also, it will help prepare decision makers to expect the differences in the cost by including these simulations in the proposals as well.

  4. John Falade on September 29, 2016 at 5:06 pm said:

    I prefer starting off on a project plan with an imposed limit (by self or by mandate) to engender creativity. My approach is to lock in the project scope and brainstorm with my team on how to bring it in within the limit. What can be done faster? do we have cheaper alternatives? what if we used a different approach? Then it becomes if we must compromise to stay within limit without sacrificing the project objectives what can we compromise? Should we be compromising it?

    This scenario challenge approach helps determine the practicality or otherwise of the proposed budget limit. More so, it helps establish a foundation for making future claims on project variations.

    My story to management is presented thus:

    The project objective is X, the Budget is $Y. If the project is to be delivered within $Y, then this and/or that and/or that and/or that must be done to deliver X or X – a. X-a is not perfect and will either not satisfy or just manage to satisfy the basic objectives of the project. If project objectives must be fully satisfied, then $Y + b, will be required to deliver it.

    Projects are subject to too many uncertainties and unknown variables to recommend an approach as the right one. The inclusion of critical stakeholders such a budget holders in the decision making process at inception via scenario challenges creates a sense of involvement and shared responsibility. Stakeholders are made aware of the inherent risks in any approach taken from inception. If there is a need for additional project funding in future, this may just be the difference between pushing through with the project or meeting a stonewall. At the end of the day, all stakeholders really want to deliver a good project. It just needs to be understood, and demonstrably so, what is to be gained and what can be lost with whichever approach is taken.

  5. David Hope on October 4, 2016 at 10:05 pm said:

    A short example. When I worked for the SA TAB some capital projects were given preliminary approval in the budget, but could not proceed without formal approval based on a sound business case. Some never made it past preliminary approval. The good thing was that the political process was already over, you just had to satisfy the CEO with a sound business case and, yes, I failed to proceed with a capital project on one occasion as I could not mount a strong enough business case. We need to be wedded to improving service delivery, not asset creation.

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