Front-end lessons: green megaprojects at risk unless government learns from HS2 blunders

Tom Baxter says the UK government must learn from past engineering project mistakes or expensive CCS, hydrogen and electricity grid megaprojects could fail

AS UK taxpayers we are all stakeholders in the government’s looming megaprojects. It plans to spend billions supporting the construction of carbon capture hubs and hydrogen production plants needed to decarbonise industry and overhauling the electricity grid for greener power supplies. If we want our money spent wisely, the government must invest with history in mind, ensuring that front-end loading, benchmarking and independent due diligence by competent individuals and organisations is undertaken before spending a penny more.

If it fails to do this, we will witness similar cost and schedule overruns that have beset other major UK projects. Unless you’ve been living under a rock, you’ll be acutely aware that the UK has tarnished its reputation for effectively delivering big infrastructure projects. The government has cancelled plans to build the HS2 high speed train route connecting London and Manchester while Hinkley Point C, the country’s first new nuclear reactor since 1995 is expected to arrive at least four years late.

I’m gravely concerned about us repeating these mistakes in the race for a greener future. Unless the UK government learns lessons from the megaproject failures like HS2, the country is doomed to fall behind in its race to lead the world in CCS and hydrogen and taxpayers will once again see billions wasted simply for the want of better planning.

The Labour government’s manifesto had much to say about achieving net zero. Here are two quotes: “We will invest in carbon capture and storage, hydrogen and marine energy, and ensure we have the long-term energy storage our country needs.”

“Labour will work with industry to upgrade our national transmission infrastructure and rewire Britain.”

What are megaprojects?

To achieve its green goals requires the engineering of megaprojects. This is not a hyperbolic term used to make the coming construction of CCS networks, hydrogen plants and nuclear reactors sound more exciting. Let us turn to the Institute of Project Management for a definition: “Megaprojects are large-scale, complex ventures that typically cost US$1bn or more, take many years to develop and build, and involve multiple public and private stakeholders. Its definition extends beyond the meaning of a traditional project because megaprojects are transformational and impact millions of people.”

IPM adds: “Typically, they involve many stakeholders, take many years to develop and implement, and are significantly more complex than other projects in technology and design. Understanding the distinctions between megaprojects and typical projects is vital for effective planning and execution. Because of these factors, megaprojects need a dedicated approach to project management to be delivered successfully.”

Megaprojects present huge project management risks because of the high costs and complexities they require to manage the lengthy supply chains and array of interfaces needed as the client liaises with the design house, and the design house with the vendor, and the vendor with sub-contractors, and so on.

As previously mentioned, Hinkley Point and HS2 are examples of substantial over-runs. At current estimates, Hinkley Point C will cost £28bn (US$35bn) more than originally predicted – that is 155% over budget. While the UK government has spent £592m buying land for HS2 that it no longer needs.

At a smaller scale, the Scottish Island ferry fiasco has seen the original cost of £97m balloon to more than £400m.

What can we learn from this? How can we prevent repeat failures?

In my own career I have seen significant cost and schedule increases on large oil and gas projects. The wash-up meetings we had on the causes of the cost and schedule underestimates frequently highlighted that the problem was a lack of front-end loading and benchmarking.

Front-end engineering is vitally important; it is where value is added or lost. This is recognised by most companies and is inherent within front-end loading.

Front-end loading is a phased approach to project planning and engineering, carried out early on in the process, at a time when the ability to influence changes to the equipment configuration and design is relatively high and the cost to make those changes is relatively low.

This is illustrated in the following chart:

Bad projects are not stopped

A review by McKinsey of capital expenditure at more than 500 global chemical projects found that “the average cost overrun for major projects is 79 percent above the initial budget, and the average schedule overrun is 52 percent above the initial schedule. These misses can often be attributed to project teams relying on overly optimistic projections informed primarily by backward-looking data or data and projections provided by entities (internal or external) with a vested interest in seeing the project move forward.”

Is this also true for megaprojects? According to the authoritative writings of Professor Bent Flyvbjerg of the University of Oxford University it is.

In his paper What You Should Know About Megaprojects and Why: An Overview, he has this to say: “Front-end planning needs to be thorough before deciding whether to give the green light to a project or stopping it before it starts. But often the situation is the exact opposite. Front-end planning is scant, bad projects are not stopped; implementation phases and delays are long; costs soar, and benefits and revenue realisation recedes into the future.”

Recent history has a clear message here, as told by last year’s report from the National Audit Office on the cancellation of phase two of HS2. The findings demonstrate that the project went forward on an incomplete understanding of the risks associated with the project, highlighting a litany of failings in planning and risk management. Among its findings, it noted: “there was little commercial consequence for contractors starting construction before ensuring the design was fully tested and confirmed as meeting requirements.” And “there was insufficient certainty on the design to set cost and schedule estimate effectively.”

I have witnessed a similar pattern when I was working in industry. It went something like this: the front-end estimating team present the cost and schedule to the project director. The project director responds that the cost is too high and will never get sanctioned. He orders the team to go away and trim it.

The front-end team do just that. Typically, contingencies are removed; design headroom reduced; equipment sparing shaved to reduce the number of mechanical items; the layout is made more compact to reduce piping, electrical and cable runs; and less expensive, less reliable equipment is selected. The result is a plant that is more congested and more difficult to operate.

As a result, the cost estimate is reduced but so is the probability of achieving it or the schedule.

I’ve heard these practices described as a plant designed by an accountant.

Front-end loading is there to prevent such practices. Engineers use the technique to provide realistic, risked, deliverable cost and schedule estimates.

Yet the project director’s role is to achieve project sanction. There is a clear tension between the two.

Avoiding a green future built on sand

It is worth noting that the UK Public Accounts Committee recently issued a report on the UK government’s plans for carbon capture, usage and storage which chimes with the message of this piece. Conclusion one states: “The Department is taking a high–risk approach by backing first–of–a–kind, unproven technologies with large amounts of taxpayer and consumer funding.”

If the government adopted robust front-end loading for the anticipated CCS projects their associated risks should become apparent enabling improved decision making.

I opened with a plea for the UK government to look after taxpayers’ money. To that end it must be mindful of the historic legacy the UK has of underestimating the cost of megaprojects.

The engineering community needs to reinforce the need for front-end loading and independent due diligence before making financial investment decisions on projects that could result in a house built on sand.