My Cost Runneth Over
Recently, I taught a construction contracting class in Phoenix and we discussed the issue of cost overruns in public procurement. My Arizona chapter colleagues had some great ideas about how to manage contract costs and change orders. I was impressed to find out that Central Arizona Project, a quasi-public organization, typically managed contracts within a 2.5 percent increase. Quite impressive!
So, how much cost overrun is acceptable in our contracts (construction or otherwise)? For many years I operated under a rule of thumb that a 20 percent increase was allowable. According to a study by the National Association of State Procurement Officials (NASPO), holding contract increases to this amount was within an industry standard. There were many times when I used this benchmark when reporting contract cost overruns to my own agency leadership and governing boards.
We have all heard stories of when this did not occur, and unfortunately, it happens much too often. The aerial tram is a very cool part of the landscape in Portland, Ore., It connects the south waterfront to the local health sciences university. A 30-minute drive in rush hour traffic is now a three-minute commute. The downside? The original contract value for the tram construction was $15 million, and the final cost came in at $58 million.
So how do we keep costs in check? In my experience, the right project manager (PM) can definitely improve your odds for success. Whether it is a seasoned PM that works for your agency as an employee, or a contracted PM through a consulting firm, this is a key partnership. Having the technical and people skills to manage our selected contractor is important, as well as a willingness to actively work with the agency’s procurement team. I have found this to be a powerful one-two punch.
If you combine this duo with a capable architect-engineer (A/E), then you are putting your agency in a strong position. The A/E will provide invaluable design services throughout the life of your project, including the procurement stage and during contract performance. By the way, make sure they weigh in on any proposed change orders. Remember, they know the design and project specifications better than anyone.
The data tells us that the majority of projects we contract for (technology, construction or other) experience schedule delays and cost overruns. Not long ago, a U.S. senator had this to say about the management of federal contracts. “We have a reputation of over-promising and under-delivering.”
My advice is to not let your agency develop such a reputation. Stay involved with your contracts, even after award. Make sure you are not the last one to know about any changes or increases. Be diligent and hold the line for your agency; work effectively with your PM to get the best performance possible out of your contractor. Finally, if you have the ability, keep track of your awarded contract value vs. final contract value. It’s a valuable metric that can demonstrate the value we provide.
Darin Matthews FNIGP, CPPO, CPSM, is the director of procurement for the University of California, Santa Cruz. He has extensive management experience, speaks throughout the world on procurement issues, and has published several books and articles on supply chain management.