How Governance Makes or Breaks a Project

Project Value Delivery

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HowGovernance

Makes or Breaks a Project

v0 – May 2017

© Project Value Delivery, 2017w w w . P r o j e c t V a l u e D e l i v e r y . c o m 2

The Project Governance Issue

• Projects and associated Capex are the decisive long term success factor of facilities and companies

• A large proportion of projects fail to deliver the expected value. Some projects might even bring companies on the brink of restructuring

• Beyond project execution issues, Governance is often the real cause of failure

• This presentation focuses on Large, Complex Projects.


Contents

• What is project/program governance for?

• General governance issues

• Governance at Contractor level: specific issues

• Governance at Owner level: specific issues

• Summary and recommendations

Section

1


What is project/program governance for?


What is Project Governance For?

Engagement and decision-making beyond remit/capability of Project Manager:• Engage stakeholders:

– Politics (local, national)– Financing– Board of Directors– Project Resource providers at executive level– Owner (for contractors)

• Mobilize internal resources as required and liaise with the rest of the organization

• Drive strategy alignment• Take the key decisions at Decision Points and for

Changes• Release of management reserves

Section

2


General governance issues


Types of governance issues

1. Organization does not understand the specifics of Project Management

2. Ineffective Governance organization

3. Inadequate decision-making framework

4. Inadequate reporting / information from Project


Type 1: organization does not understand the specifics of Project Management

• In many organizations, Project Management is not the core activity. Executive managers do not have project execution background. They run repetitive businesses.

• Project execution requires a specific approach and specific reflex behaviors that can be opposite to usual management practices

Governance body does not provide useful support to Project Manager, takes decision opposite to project good practice that are detrimental



Examples• Underestimation of required Project Management Team

– (alternate): easier savings is cutting PMT team– (alternate): delegation without control to EPCm contractor whose

incentives are not aligned with Owner’s project objectives• Insufficient investment in Project Control tools and

infrastructure at project setup • Inadequate planning at the start of the project• Does not setup an integrated project team with all relevant

functions • Too late involvement of Operations personnel• Etc.



• What many CEOs do not realize is that Capex projects even with limited yearly expenditure compared to overall revenue can make or break the company on the short/medium term

• Typically Capex projects of total value above 10% of company revenue can be critical. This varies per industry– 2.5% of revenue per year

OOM calculation: suppose Revenue/Capex leverage factor of 5, net margin of 10%, typical large Capex project over 4 years.Critical Capex project value of 5% of annual revenue = 25% of current asset base


Type 2: Ineffective governance organization

• Governance must be effective– Be clear about scope of governance so as not to intrude into

Project Manager’s remit (governance charter)– Make decisions effectively and quickly– With a single voice give clear guidance to the Project

Manager– Ensure alignment with organization’s strategy– Provide an avenue for difficult, deep, frank conversations that

really address the issues– Provide an avenue for resolving conflicts with external

stakeholder above project level to preserve momentum and relations

• Governance must be at the right level– Major/key Capex projects must report to executive

committee member or even directly to the CEO



• Too many people…

“Too many governance teams are stacked with ‘stakeholders’ to secure buy-in rather than people with proven ability to govern projects. These people are often heavily conflicted and have no accountability for their project governance role” - Graeme Cocks, Melbourne Business School associate professor.



• No possibility to really feedback reality to single decision-maker…



• Comitology…



• Special for long projects: the lack of accountability over the duration of the project because of the change of Steering committee and Project Manager • Also lack of

continuity and knowledge management impedes performance


Type 3: Inadequate decision-making framework

Key decision-making effectiveness factors

– timeliness, speed and relevance of decisions

– structured approach to governance decision-making (e.g. Gate-based governance)

– Timeliness of decision-making/commitments + availability for unexpected events is essential


Type 3: Inadequate decision-making framework

Examples

• No clear decision points defined in advance lead to decisions being taken after the fact

• Commitments taking too long impacting project delivery severely

• No list checks and required available material at various gates

• No discipline in the application of gate-based governance process


Type 4: Inadequate reporting/ information from Project

• Project control not effective – does not provide accurate status– Often due to insufficient investment due to

governance

• No independent / peer review to give alternate opinion on the project


Type 4: Inadequate reporting/ information from Project

• Analysis and information need to be able to provide insight and early warning of potential future issues

Section

3


Governance at Contractor level: specific issues


Governance issues at Contractor Level

• Lack of designation/commitment of Project Sponsor• No setup of sponsor committee with Owner at a

sufficiently high level• Lack of authority of the Project Manager causing

delays in decision-making for key subcontracts and commitments

• JV/consortium levels governance not always adequate for project execution (participants to steering committee, JV agreement)– Includes sometimes even internal issues within

contractor between BUs• Interface management with other parties in the

project not properly managed

Section

4


Governance at Owner level: specific issues


Governance issues at Owner Level

• Lack of understanding of Project Management by executive management– Inadequate decisions can jeopardize the business by – Lack of investment into proper people, tools and processes

• No/Poor project governance framework• Lack of recognition of Project Manager

– For major Capex should report directly to CXO• Lack of internal expertise and lack of appetence for

mobilizing external experts• Procurement process does not select best contractor for the

work or proper contractual framework• Use of EPC management contractor to act on its behalf

preventing project success through lack of Owner involvement and lack of willingness of management contractor to accept beneficial compromises


Governance issues at Owner Level

• Lack of adoption of proper pre-Final Investment Decision (FID) process (FEL type gate process)

• Insufficient pre-FID investment and budgets• Lack of discipline at gate review leading to project FID with

lack of maturity of engineering• Lack of discipline in business case analysis and assumptions

Conclusion


Summary and recommendations


Governance issues are major contributors to poor Project performance

And…They make the life of the Project Team miserable


Project governance general recommendations

• Ensure clear roles and responsibilities between Steering committee and project

• Ensure a Project Sponsor is part of the Steering Committee and is its single voice and its single point of contact

• Recognize that Project Management requires specific skills, experience, tools– Executive level education required in non-project organizations

• The reporting level of the Project Manager is an essential indicator/parameter in Owner organizations

• Make sure that there is sufficient budget for PMT and that it is invested early (before FID, at the start of the project…)

• When there are difficulties in Project Execution do not hesitate to investigate the influence of actual project governance. It is often a key factor


Inadequate Project governance is not inevitable

Focus on and invest in proper governance to be successful in project execution

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