McKinsey Finds Staggering Increase in Construction Cost Overruns

Across sectors and asset classes, large projects are taking longer than anticipated and running significantly over budget, according to a report released by global consulting firm McKinsey & Company.

Large projects across asset classes typically take 20 percent longer to finish than scheduled and are up to 80 percent over budget.

What is the primary cause of this loss in productivity and leakage of capital? The report’s authors determine a single point of failure: “The industry has not yet embraced new digital technologies that need up-front investment, even if the long-term benefits are significant.”

Paper-Based Processes Cause Many of the Problems That Lead to Project Overruns

According to McKinsey, the construction industry is stymied by paper-based processes that don’t support the cross-team collaboration, reliable document management or real-time decision making that modern construction projects need in order to be successful.

Relying on paper to manage communication flows, procurement orders and status reports is fraught with problems.

• Due to the lack of digitization, information sharing is delayed and may not be universal.
• Owners and contractors therefore often work from different versions of reality.
• The use of paper makes it difficult to capture and analyze data; that matters because in procurement and contracting, historical performance analytics can lead to better outcomes and risk management.
• Mismanaged paper trails also routinely spur disagreements between owners and contractors on such matters as construction progress, change orders, and claims management.
• Finally, paper trails simply take more time. (Agarwal 7)

Digitizing Processes Leads to More Predictable Project Results

McKinsey identifies ‘process digitization’ as the way forward to get construction projects back on schedule and on budget. “Process digitization means moving away from paper and toward online, real-time sharing of information to ensure transparency and collaboration, timely progress and risk assessment, quality control, and, eventually, better and more reliable outcomes.”

• The result of process digitization is a correction of the paper-based process shortcomings outlined above.
• Information sharing is timely and inclusive.
• All project participants have access to the same, most recent document version.
• Data is easy to capture and analyze, supporting historical performance analysis for better outcomes and risk management.
• Digital actions taken on bid submission, progress reports, change orders and claims are easy to track and audit.
• Digital processes are inherently faster.

The report’s authors highlight a particular tunnel construction project in the US as an example of the successful implementation of digital processes. The project team, using a single online platform for bidding, tendering and contract management, “saved more than 20 hours of staff time per week, cut down the time to generate reports by 75 percent, and sped up document transmittals by 90 percent.”

To learn more about the report’s findings see Imagining construction’s digital future. Published by McKinsey & Company: Capital Projects and Infrastructure.