Over the past decade, owners and contractors have made tremendous progress in improving the delivery of capital projects however the construction sector still lags behind other sectors in productivity and efficiency norms and is often facing schedule and cost overruns. Cost overruns As per KPMG’s global construction survey conducted in 2023 for 267 engineering and construction sector organisations, 37 per cent of the organisations have faced cost or schedule overruns of more than 20 per cent. A similar pattern is also seen from project performance data published by MOSPI in 2023. Project cost has increased by about 17 per cent for 411 projects out of the total 1,788 projects executed in India by public sector organisations. While lack of optimised project processes, technology adoption and automation result in inefficient execution of projects, the major causes of cost overruns on projects stem from poor initial set up, inadequate planning, unpreparedness for unexpected changes and inadequate control mechanisms. Initial project setup Any organisation’s ability to manage cost during project execution is best determined and controlled in the initial set up phase where the organisation’s ability to control costs is at its peak. It is very similar to setting a ship’s course at the beginning of a voyage. Aspects like project delivery structure, design planning, construction methodology, sourcing strategy, contracting model, construction strategy and logistics planning will need to be carefully considered at the beginning of the project. This requires a thorough understanding of the internal capabilities of the organisation, assessment of external contractor and vendor ecosystem, cross functional collaboration, scenario planning and lessons learnt from delivery of past similar projects. Efficient planning Cost overruns can be effectively controlled by thorough and efficient planning by accurately budgeting, clearly defining the project scope and optimising the resource allocation. Effective planning also involves proactive risk management, schedule management and strategic procurement. Together, these practices maximise the possibility of completing the project within budget. In the Global Construction survey conducted by KPMG in 2023, 83 per cent respondents mentioned that improving the estimating accuracy of materials and equipment is top priority. This ultimately is linked to increasing confidence in the project in the planning phase itself. For example, large, mature organisations globally carry out activity-based costing linked to technical requirements, study the route survey to assess logistics challenges, build resource loaded detailed schedules based on a repository of data and develop building information models for interface and construction sequencing at the planning stage itself. Navigating unexpected changes Navigating unexpected changes in project implementation requires proactive risk management, flexible strategies, robust change management and effective communication strategies. A structured approach to identify, assess and respond to changes allows the project team to adapt to new conditions without derailing the project. Typical risks that a project organisation faces include scope change, prolongation, material price variation, currency variation, change of law and supply chain disruptions. Strategies like hedging, contingency planning, long term and back-to-back contracts, diversified procurement approach through alternative sourcing channels help build resilience and hence navigate the unexpected changes. Large construction firms are investing in robotics and automation not only to improve efficiency but to de-risk themselves in the face of workforce challenges. Predictive modelling tools are helping organisations generate project cost scenarios and determine confidence intervals for project cost completion based on probability of risk occurrence. Robust control mechanisms Control mechanisms including performance tracking, cost management systems and project monitoring tools provide early warnings of potential issues and deviations to facilitate timely actions and adjustments to prevent cost overruns and delays. There are many technologies like Integrated Project Management System (IPMS), drone-based image analytics, AI/ML based decision support system, 4D/5D Building information Modelling and Internet of Things (IoT) sensors which have been successfully deployed for effectively controlling the project implementation. As per the report published by Future Market insights in July 2023 - 'Construction Tech Market Share, Trends and Forecast 2033' - the global construction technology market is estimated to reach $ 24 billion by 2033, growing at a CAGR of 16.9 per cent over the forecast period and the industry is continuing to deal with disruptions in innovation and technology. Levers for cost optimisation The table presents a selection of innovative cost optimisation strategies and levers that have been successfully employed in numerous high performing projects worldwide and offer valuable opportunities to enhance efficiency and manage costs effectively. There is immense potential to control costs and unlock significant value in the capital projects leading to a manifold increase in returns when projects are managed strategically from the outset. Effective cost management entails strong project set up, thorough and efficient planning, ability to manage unexpected changes and robust project control mechanisms. By deploying innovative and strategic cost optimisation levers, the investments on capital projects can deliver the intended objectives. About the author Karun Raj Singh Sareen, Partner, Major Projects Advisory, KPMG, has over 22 years of experience in planning and implementing large capital projects in sectors such as metro rail, urban infrastructure, roads, irrigation, water, and industrial projects.