Construction project feasibility studies using the traditional approach

Introduction

In the past feasibility studies for projects have been developed on an ad hoc basis because a standardised approach has never really been developed. As a result various large organisations like the international oil companies and the British Airports Authority have developed their own in-house systems to improve the process.

The old unstructured approach has been successful on many projects in the past but the complexity of the processes involved in a large project inevitably results in a quite high risk of failure when the project either runs very late or is wildly over budget or even worse just does not work.

If you have already downloaded the Ebook you will already have the knowledge of how to improve upon the old ways!

The investment life-cycle

The investment life-cycle was normally considered to consist of 6 separate stages of development that can overlap. These are:

Opportunity identification

Someone has a bright idea, and an initial assessment is made. If the opportunity stands up during an initial analysis than funds are commited for further investigation. It is possible that a pre-feasibility study may be necessary before further funds can be committed. This is conventionally a very ad-hoc process and the lack of control duringn this stage is often a prime cause of project failure.

Appraisal

The appraisal stage should include a comprehensive feasibility study that clearly identifies all the development options and the one that is the most attractive

The appraisal will probably include:

At the end of this stage an interim go / no-go decision will need to be made.

Investment planning

This stage may include:

At the end of this stage a final go / no-go decision will have to be made.

Asset creation

This stage will include:

1. The preparation of a detailed construction schedule

2. Detailed design

3. Construction

4. Commissioning

Operation

This involves operating and maintaining the asset to provided the benefits that were defined in Item 1 of the Appraisal stage.

Close-down

The end of the investment life-cycle that may be determined by:

Summary

The investment life-cycle stages are summarised in the following table:

Conclusion

It is apparent that the above process can become so complex on many projects that an ad-hoc approach to project development will result in a high risk that either the project just does not work or overruns on time and / or cost.

It is also the case that most projects will require the input of specialist skills that are not available from the company or organisation that identified the opportunity. Consultants and other contractors may then required and it then becomes very difficult to decide who does what and to ensure that all the best development options are thoroughly explored and compared with each other.

It is also the case that consultants are often asked to undertake the feasibility studies because they have the necessary skills. Objectivity can then easily be lost because the consultants will often have a vested interest in the adoption of one or more of the alternatives i.e. more work and more fees!

However the biggest danger in this approach is that the stages begin to overlap and this can result in the Asset Creation stage starting before all the neccessary planning and approvals are in place. This results in late changes and consequent delays and cost overruns.

And what drives the whole process?

The most important driver in the conventional project development process is that the cost and duration of the next stage of project development is known before funds are committed to it.

This can be extraordinairly difficult for the inexperienced project manager and so it is common for cost and duration overruns to occur during the Appraisal, Investment Planning and Asset Creation stages.

Click on the link on the right Cost accuracy graph for a useful aid in estimating these costs.