Eric Kronenberg

Fadi Majdalani
Ekaterina Arsenieva
Jennifer Latka
Perspective
Managing the Managers
Effective PMC
Oversight on Large
Infrastructure Projects
Contact Information
Beirut
Fadi Majdalani
Partner
+961-1-985-655
fadi.majdalani@booz.com
Dubai
Ekaterina Arsenieva
Senior Associate
+971-4-390-0290
ekaterina.arsenieva@booz.com
Florham Park, NJ
Eric Kronenberg
Partner
+1-973-410-7621
eric.kronenberg@booz.com
Jennifer Latka
Senior Associate
+1-202-368-5877
jennifer.latka@booz.com
Booz & Company
1 Booz & Company
EXECUTIVE
SUMMARY
Cost overruns and schedule delays are endemic to completing
large infrastructure projects. Nine out of 10 projects incur
some cost escalation, and an even larger number of projects
are completed later than originally anticipated. Although
these issues cross all borders, they are very pronounced
in developing nations where new, less-experienced
institutionsin both the public and private sectorsare
embarking on large, complex projects. In the Middle East,
many companies engage seasoned program management
consultants (PMCs) with sterling reputations to oversee the
process of a large infrastructure project. But using a PMC
does not guarantee successful results. Burj Khalifa, Dubai
Metro, Masdar City, and Khalifa Port and Industrial Zone
(KPIZ) are among recent examples of large PMC-led projects
in the region. All of those projects experienced schedule
delays, which in many cases can lead to cost escalations.
From an external perspective, it is diffcult to pinpoint what
triggers delays and cost overruns in any specifc large-scale
project. However, many projects cost more and take longer
than anticipated because of a lack of coordination and
alignment of interests between the project owner and the
PMC. Owners can improve their relationships with PMCs
and increase the likelihood of project success by focusing
on three areas: defning the right management structure or
operating model, designing the PMC contract to provide
effective incentives, and developing adequate internal
capabilities to monitor the project.
2 Booz & Company
HIGHLIGHTS
Recent examples of large
infrastructure projects show that
the delays can run from months
into years, and costs can be up to
four times as much as estimated.
Properly structuring the
relationship between the owner
and the PMC, with the right
operating model, can increase
the likelihood of project success.
The right kind of contract for the
project will ensure alignment
between the owners interests
and those of the PMC.
The owner must have suffcient
internal capabilities to manage
those aspects of the project that
are critical to its business, as well
as the ability to provide suffcient
oversight on those areas
managed by the PMC.
THE CHALLENGES
OF MANAGING
INFRASTRUCTURE
DEVELOPMENT
For most organizations, successfully
managing large infrastructure
development is an extremely diffcult
task. Cost overruns and schedule
delays tend to be the norm rather
than the exception. There are
notorious examples of troubled
projects: The Panama Canal took
two years longer and cost three
times as much as anticipated.
1
The
Big Dig in Massachusettsa
three-decade-long quest to expand
Bostons major interstate highway,
bury it underground, and carve out
a new tunnel to its international
airporttook 22 months longer than
expected, and the cost was quadruple
initial expectations.
2
No sector is
immune to these challenges: Rail
development projects experience cost
overruns of 45 percent on average,
tunnel and bridge projects more
than 30 percent, and road projects
about 20 percent.
3
Problems in
project execution have signifcant
implications for ownersfnancial
losses and lost business opportunities,
as well as political pressures and
damaged reputations.
Project management issues are even
more pronounced in the Middle
East, where many newly formed
organizations are embarking on
unique and ambitious projects.
3 Booz & Company
Many project owners fnd that
they lack the resources, tools, and
processes required to manage projects
within their own organizations.
Furthermore, the beneft of building
a large internal workforce with these
capabilities often does not outweigh
the cost. Therefore, instead of serving
as the program manager themselves,
owners hire professional PMCs to
manage project execution, expecting
that they can ensure successful
project delivery. The PMC acts as
the owners representative and is
expected to provide skilled personnel,
relevant experience, and world-class
tools and processes.
But by no means does the hiring of
a PMC guarantee that a project will
be delivered on time and on budget.
Many recent regional projects
underscore this pointincluding the
building of the Burj Khalifa, Dubai
Metro, Masdar City, and KPIZ.
Each of these projects had a PMC of
good repute responsible for project
delivery. Yet, all incurred schedule
delays, which in many cases can lead
to cost escalation. Owners were left
wondering: How did these PMCs fail
to foresee, mitigate, and manage the
project risks?
It is diffcult for an outsider to know
what went wrong with any given
project. Many factors can prevent
a project from being completed
successfullyand some are outside
the control of either the owner or the
PMC, such as weather delays and
increases in the cost of materials.
Most projects, though, run into
severe trouble if the objectives of the
owner and the PMC are not aligned.
Over the next 20 years, spending on
transportation, industrial, and real
estate infrastructure in the MENA
region is expected to exceed US$680
billion (see Exhibit 1).
4
Owners must
develop a structure that aligns the
PMCs objectives with their own
objectives to ensure successful project
completion. A projects owners must
address three key areas: the operating
model, the contract with the PMC,
and their own internal capabilities
and organization.
Source: International Monetary Fund; Global Insight 2009; MEED; Zawya; Booz & Company analysis
Exhibit 1
Infrastructure Projects Require Substantial Investments
MENA INFRASTRUCTURE PROJECTS PROJECTED INVESTMENTS BY SECTOR
(20092030, US$ BILLIONS)
158
76
71
44
115
109
685 27
22
29
35
Railways
and
Metro
Airports Roads Ports Bridges,
Tunnels,
and
Waterways
Industrial
Zones
Free
Zones
Other
Develop-
ments
Mixed
Develop-
ments
Leisure,
Entertain-
ment,
Community,
Hotels
Total
Transportation
= $377 billion
Industrial
= $245 billion
Real Estate / Travel
and Tourism
= $62 billion
4 Booz & Company
An owner can choose between
several operating models to manage
a large-scale development effort.
First, for some projects, an owner
can and should serve as its own
program manager. This is especially
the case if the project requires
specialized capabilities that the
owner can apply to similar projects
in the future and that can serve as
a source of competitive advantage.
For example, The Walt Disney Co.
serves as program manager for
the development of all its theme
parks, as that is a recurrent area of
business expansion and one of its
core competencies. In the case where
project owners retain full control
of the development, all program
management activities are performed
in-house and the owner shoulders the
responsibility for integrating all parts
of the effort.
Other situations call for multiple
PMCs working on various pieces of
the development. The owner of the
project monitors all activities and is
responsible for overall integration,
while the project managers retain
some lower-level integration oversight.
Finally, a project owner can engage
a single PMC, handing over the full
responsibility of integration and
execution of the project while merely
tracking its activities.
There is no uniform prescription
for project management; the correct
model needs to consider elements
such as the size of the organization,
the owners willingness and ability
to be involved, the needed scope
of integration, and whether or not
the activity is critical to the owners
business model or obligation as a
public-sector organization.
In all instances, however, it is critical
to note that the owner ultimately
bears responsibility for the project
and should provide oversight
accordingly. As such, it must clearly
determine and assign responsibilities
at the outset to ensure that nothing
slips through the cracks.
CHOOSING
THE RIGHT
OPERATING
MODEL
5 Booz & Company
DESIGNING
AN EFFECTIVE
CONTRACT
STRUCTURE
The contract between the PMC and
the project owner is far from a mere
formality; it is the vehicle that aligns
the interests of the two parties. The
fnancial arrangement must provide
proper incentive for the PMC to act
in the best interest of the projector
else costs and delays could arise.
The contract must also formalize the
delegation of responsibilities that the
owner and the PMC agreed upon
when designing the operating model.
PMC contracts in the Middle East
typically have both fnancial and
nonfnancial issues. The primary
fnancial problem is the disconnect
between payment and performance,
caused by the terms typically
employed in PMC contracts in the
Middle East. The nonfnancial issues
often involve poorly defned scope
of work and minimal performance
standards.
Financial Structure Issues
Perhaps the most critical aspect of a
contract with a PMC is its fnancial
structure, as the PMC typically
is motivated by its own business
objectives. There are three primary
contract types: lump sum, time and
materials, and cost plus incentive fee.
Lump sum payment structures, in
which a fat price is agreed upon at
the outset, offer the lowest risk to
the owner and the highest risk to the
PMC, since the PMC will be forced
to eat the cost of any increased costs
or overruns. Although this model
offers the PMC a strong incentive to
fnish on time and on budget, it is
likely to make the PMC extremely
infexible regarding necessary changes
and could even lead to quality
concerns as it tempts the PMC to cut
corners. In lump sum arrangements,
the owner must also be prepared for
the PMC to submit claims, sometimes
of dubious merit, for increased costs
that it believes were directly or
indirectly incurred by the owner and
should not be borne by the PMC.
Many contracts in the Middle East
stipulate a simple time and materials
structure, in which the PMC
6 Booz & Company
negotiates hourly or daily labor rates
for each of the staff positions that
will support the project. These rates
typically cover both PMC costs and
proft. In contrast to the lump sum
approach, this assigns the majority
of risk to the owner and little to the
PMC. If the PMC is compensated
on this basis and the contract lacks
strong oversight mechanisms,
the PMC has little incentive to
complete the project on schedule,
as delays will actually increase its
revenue and proft. The time and
materials contract has advantages:
It is appropriate when technical
requirements are still evolving
or when there is a high degree of
specialization or technical diffculty.
However, it mandates that strong
oversight mechanisms are included
in the contract. Regular performance
evaluations must be rigorous, and
the owners right to terminate the
contract must be well defned.
An effective model for many
contracts is a cost plus incentive
fee structure, which covers costs
and provides a fee for bringing the
project to fruition on time or within
a budget range; this approach shares
the risk evenly between the owner
and the PMC. Although this type
of contract is a bit more complex
than the other two and not yet
common in the Middle East, such
performance and cost incentives are
commonly used in Europe and the
U.S. to align the objectives of the
owner and the PMC.
Nonfnancial Issues
There are several examples of
nonfnancial contract issues that
can have a signifcant impact on the
PMCs performance.

First, the scope of work must
be described thoroughly and
explicitly, including specifc tasks,
anticipated outcomes, and associated
deliverables. Without such clarity,
the owner has minimal recourse
7 Booz & Company
when disagreements arise over what
is required of the PMC to execute
the project. For example, if a quality
assurance function is not explicitly
required and detailed in the contract,
the owner will not be able to hold
the PMC accountable for lack of
oversight of contractor quality issues.
As a result, PMC contracts must
include a comprehensive set of
performance standards and metrics
that defne the measurement process
and the acceptable level of PMC
performance. The owner must
specify expectations on factors
such as timeliness, quality of work,
responsiveness, and contractor
management standards. If such
standards are not defned, there is no
way to establish and take action on
subpar performance. For instance,
an owner can require a certain
average number of days to review
design deliverables, set an average
number of days to solve urgent
issues, and specify a percentage of
milestones that need to be completed
on time during a certain period. It is
important to have a balanced set of
standards, covering both schedule and
quality, to ensure that the PMC does
not sacrifce either of those.

Additionally, contracts must make
staffng processes transparent, and
PMC personnel levels must be based
on workload. Unless the contract
is lump sum, the owner must have
some control over the number
of PMC staff to avoid escalating
staff costs. As part of contractual
negotiations, the owner and the
PMC should agree to a staffng
plan that details the PMCs tasks
and the level of effort required to
complete them. Changes to staffng
levels should be approved by the
owner. This is required for cost-plus
contracts, because the PMC will be
motivated to increase staffng levels
rather than improve performance of
existing personnel.
The owner and the PMC should agree
to a staffng plan that details the
PMCs tasks and the level of effort
required to complete them.
8 Booz & Company
Many owners are quick to use
a PMC without fully thinking
through what is required of their
organizations. It is important
to recognize that the owner of a
project always bears the ultimate
responsibilitygetting credit for
project success as well as blame
for failures. In the recent example
of the oil spill in the Gulf of
Mexico, it is not entirely clear what
happened or which companyBP
or its contractorsis to blame. But
regardless of who is at fault, BP is,
at the very least, bearing the brunt
of the negative publicity and the
resulting damage to its reputation
and brand.
If choosing to use a PMC, a project
owner must consider frst the
appropriate level of involvement
in day-to-day project management,
given its own capabilities and
manpower, the complexity of project
integration, and the knowledge that
the owner will need to retain within
the organization at the end of the
project. Second, the owner must
determine how to make decisions
effciently and what level of control
to delegate to the PMC.
Level of Involvement
Two distinct situations have
surfaced among many PMC-led
projectsone in which the owner
BUILDING
INTERNAL
CAPABILITIES
AND
ORGANIZATION
9 Booz & Company
is too involved in the daily program
management, performing duplicate
roles with the PMC, and one in
which the owner is too far removed
from the program management,
lacking any control over the
projects success.
In the first situation, the
responsibilities of the owner versus
the PMC are not defined clearly.
With blurred responsibilities, there
can be duplication of roles in the
two organizations, leading to a lack
of accountability. The Big Dig is
a notorious example of this: The
owner, Massachusetts Turnpike
Authority (MTA), had an internal
program management team that
worked as a partner with the PMC,
Bechtel/Parsons Brinckerhoff. This
duplication of roles resulted in no
supervising authority to hold the
program manager accountable
when a problem arose, it was
unclear who was accountable
because both the owner and the
PMC were functioning as program
manager.
5
When there is unclear
accountability, it is easy for cost
and schedule overruns to occur
as the owner and the PMC point
fingers at each other. In general,
when using a PMC, the owner
should assume the supervisory role,
overseeing the PMC and monitoring
the projects progress. The roles,
responsibilities, and governance
structure determined by the
operating model and spelled out in
the contract must be accounted for
within the organization.
In the second situation, owners
rely too heavily on the PMC
and underestimate their own
responsibilities. This also typically
results in cost and schedule
overruns; the PMC cannot be given
free rein because it has inherently
different objectives from the owner.
Again, this is true even in lump sum
contracts because the PMC may
cut corners or file excessive claims.
With blurred responsibilities, there
can be duplication of roles in the two
organizations, leading to a lack of
accountability.
10 Booz & Company
Once again, in its role as supervisor,
the owner should actively monitor
the PMCs performance and the
projects progress. This includes
a certain level of cost, schedule,
and quality auditing. It requires
that the owner have a small,
experienced staff capable of
performing the audits and asking
the right questions. Prior to hiring a
PMC and kicking off a project, the
owners should ensure these internal
capabilities are in place.
Owners need to retain control
over critical project decisions, such
as approvals of major changes to
scope and schedule or contractor
selection. These roles require a
certain level of program management
expertise and previous experience
to understand schedule and cost
trends, integration intricacies, risks
and quality issues, and contractor
agreements. These capabilities need
to be built without dramatically
expanding the workforce. The owner
can have a small staff comprising
experts in project controls; contracts;
engineering; construction; and health,
safety, and environment.
Decisions and Control
Furthermore, owners must establish a
clear, explicit, and effcient decision-
making chain for the project, both
between the PMC and the owner,
and within the owners organization.
Owners can delegate some decision-
making authority to the PMC in
11 Booz & Company
order to successfully execute the
project on time, based on dollar
amount or type of decision; the
maturity of the relationship and the
previous successes of the PMC will
determine how much control the
owner is willing to give up.
The key is to fnd a balance between
too much and too little authority.
For example, in a recent client
engagement, we encountered a
situation in which the PMC had no
monetary authority limit and had
to obtain client approval even on
$1 changes, delaying the projects
progress. Clearly, the owner here had
too much control, delegating almost
no authority to the PMC. But too
little control is equally problematic
for changes to the project that have
signifcant implications in terms of
cost, schedule, or scope, the PMC
must present the problem and
potential solutions to the owner, who
must make the fnal decision.
For a project to run smoothly
without schedule delays, this
control structure must be defned
before the PMC begins working.
A separate decision-making entity
(a small committee, for instance)
could facilitate project decisions.
Therefore, if approval from a board
is required for critical decisions, yet
that board meets only monthly, a
subset of the board members may
form a committee meeting weekly or
as necessary.
Owners must establish a clear, explicit,
and effcient decision-making chain,
both between the PMC and the owner,
and within the owners organization.
12 Booz & Company
Over the next 20 years, infrastructure
owners in the MENA region will make
massive investments in large projects.
Managing those projects will not
be a simple task: An overwhelming
number of large projects end up mired
in delays or over budget. As a result,
project owners will continue to turn
to professional program managers to
help them execute projects. That alone
is not enough. Signing up a PMC,
even a very good one with a strong
track record, does not guarantee
success. Project owners tend to
underestimate the amount of work
that needs to be done internallyeven
when bringing on a PMC.
To reap the benefts of engaging a
PMC and to increase the likelihood
of success, project owners need
to clearly defne the relationship
with the PMC up front. They
need to establish effective project
governance, enter into an effective
PMC contractwhich aligns all
parties interests and encourages
performanceand build internal
capabilities to track and monitor
the projects progress. Without
these measures in place, new
infrastructure projects are likely to
stumble over the same issues that
have plagued their predecessors.
CONCLUSION
13 Booz & Company
About the Authors
Eric Kronenberg is a partner
with Booz & Company
in Florham Park, N.J. He
specializes in developing
functional excellence
in program and project
management, engineering and
design, and manufacturing
and construction in multiple
industries, including aerospace
and defense, energy, and
transportation.
Fadi Majdalani is a partner with
Booz & Company in Beirut and
leads the frms transportation
practice in the Middle East. He
has advised on strategic and
operational topics for a number
of transport infrastructure
stakeholders, including
policymakers, regulators,
operators, and investors.
Ekaterina Arsenieva is
a senior associate with
Booz & Company in Dubai.
She specializes in market
assessment and strategy
development, strategic and
business planning, and
organizational development
and transformation for
public transport authorities,
investment entities,
infrastructure, transportation,
and logistics companies.
Jennifer Latka is a
senior associate with
Booz & Company in Florham
Park, N.J. She focuses on
improving organizational
effectiveness and operational
effciency for commercial
aerospace, defense, and
transportation companies.
Endnotes
1
Panama Canal Construction, 19031914, GlobalSecurity.org.
2
Bent Flyvbjerg, Cost Overruns and Demand Shortfalls in
Urban Rail and Other Infrastructure, Transportation Planning
and Technology, vol. 30, no. 1, February 2007 ; Raphael Lewis,
Big Dig overrun is just plain big, Boston Globe, July 14, 2002;
Raphael Lewis and Sean P. Murphy, Artery errors cost more than
$1b, Boston Globe, February 9, 2003.
3
Raphael Lewis, Big Dig overrun is just plain big, Boston Globe,
July 14, 2002; literature search; Booz & Company analysis.
4
International Monetary Fund; Global Insight 2009; MEED;
Zawya; Booz & Company analysis.
5
Completing the Big Dig: Managing the Final Stages of Bostons
Central Artery/Tunnel Project, The National Academies Press,
2003.
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