The Importance of Escalation Safeguards
In our last blog, Darren Cave examined the Importance of Understanding Volatility and Escalation. Expanding on the themes and challenges identified, in this blog, Darren outlines how project teams can minimise the key drivers of cost escalation:
- Time
- Scope Creep
- Market Conditions
- Risk Allocation
- Developer Approach
Escalation Protection
At Lidiar Group, to safeguard against escalating costs, we take a proven approach that minimises the risk of escalation through a ten-stage process that has worked for our clients across multiple industries, markets and project types:
- Ensure the business case is solid and secure funding to drive the project forward
A robust business case underpins the entire project, aligning the project’s purpose, benefits, and financial viability. Without it, securing funding becomes difficult, and the project may falter early. A comprehensive analysis of market conditions, potential risks, and projected returns is crucial for garnering stakeholder confidence and financial backing.
Example: The Melbourne Metro Tunnel project initially faced challenges due to an underdeveloped business case, resulting in project scope changes and subsequent cost increases. - Conduct a thorough, first-principles project cost estimate, including contingencies and escalation allowances, while addressing key risks as early as possible
Starting with a first-principles approach to cost estimation means building your budget from the ground up, accounting for every component and potential risk. Contingencies and escalation allowances safeguard against unforeseen developments, and addressing key risks early mitigates their potential to impact later stages.
Example: Sydney’s WestConnex road project saw cost blowouts, in part because early estimates didn’t fully account for cost escalations related to land acquisition and contractor disputes. - Finalise all necessary approvals and confirm funding is in place
Approvals can often be time-consuming, and delays here can create a domino effect throughout the project. Ensuring all planning, environmental, and regulatory approvals are secured early gives the project a clear path forward. Confirming funding at this stage also ensures that the project isn’t delayed while awaiting financial arrangements.
Example: The Carmichael coal mine project in Queensland faced significant delays due to environmental and Indigenous land use approvals, which pushed timelines and increased costs. - Perform upfront studies—surveys, geotechnical investigations, environmental checks—to refine design requirements
Skipping or rushing through essential preliminary studies can lead to major redesigns later, with knock-on effects on costs and timelines. Thorough site investigations and environmental assessments help avoid costly surprises during construction.
Example: The Inland Rail project has faced delays due to unforeseen geotechnical issues that could have been identified earlier through more comprehensive studies. - Progress the design to at least 80% completion to gain confidence in the project’s scope
Advancing the design to 80% completion before tendering provides more certainty about the project’s scope and potential costs. At this stage, the design should be well-developed, reducing the risk of scope changes or major variations later.
Example: The Sydney Light Rail project was significantly delayed and over budget due to changes in scope and the need to redesign key components after construction had started. - Develop clear, detailed project specifications and plans
Ambiguous or incomplete specifications often lead to misunderstandings and disputes between developers and contractors. Detailed plans clarify expectations, timelines, and deliverables, helping ensure smooth project execution.
Example: Brisbane’s Cross River Rail project encountered early challenges with contractors due to misalignment in expectations from incomplete project specifications. - Pre-qualify contractors, selecting 3-5 that have the capability and capacity to deliver
Selecting the right contractors is crucial. By pre-qualifying potential contractors, you ensure they have the necessary experience, financial capacity, and expertise to deliver on time and within budget. Vetting contractors based on past performance on similar projects can also mitigate risks.
Example: The Snowy 2.0 project has experienced challenges due to contractor delays and issues with capacity, highlighting the importance of pre-qualification. - Draft fair contract terms reflecting market realities and appropriately allocate risk
Contract terms should not only be fair but also reflect the current market conditions. Overloading contractors with excessive risk can lead to inflated bids or disputes down the line. Instead, risks should be shared appropriately, with pain-share/gain-share mechanisms in place to handle unforeseen developments.
Example: The new Western Sydney Airport project successfully managed contractor relationships through clear and fair contract terms, avoiding many of the pitfalls of projects like Sydney Light Rail. - Once all elements are in place, tender competitively, ensuring readiness to proceed
Competitive tendering ensures you’re getting the best value for money, but only if all the preparatory work has been completed. Going to tender prematurely, with incomplete design or unresolved approvals, can result in later delays and cost overruns.
Example: The Melbourne West Gate Tunnel project experienced significant delays because tenders were awarded before all environmental approvals were finalised, resulting in costly rework. - Award contracts promptly to avoid delays and changes during tender validity periods
Delaying contract awards can lead to price changes or contractors withdrawing from the tender process. Staying within tender validity periods keeps contractors committed to their bids and helps maintain cost certainty.
Example: The Sydney Metro project experienced issues when delays in contract awards led to some contractors revising their bids due to changing market conditions.
Benefits of This Approach
By following this structured approach, project developers can significantly reduce the likelihood of cost escalation and time overruns. Early identification and management of risks through thorough planning, pre-qualification, and clear contract terms build confidence in both developers and contractors. The result is a more predictable project outcome, with fewer disputes, fewer variations, and stronger relationships between all parties involved.
Furthermore, projects with strong foundations in solid business cases and comprehensive design development tend to attract better funding options, as stakeholders see the project as well-managed and less risky. This leads to better financing terms and, ultimately, greater financial success for the project.
This approach demands expertise, upfront investment, and patience, but it significantly reduces the risk of unexpected cost increases. Having the right in-house team or working with experienced experts can make all the difference in delivering a project on time and within budget, and at Lidiar Group, we are here to help ensure that your project can proceed with confidence and reduce the risk of escalation and blowouts to time and budget.