65% of megaprojects fail; find out why and how to do them right

Industrial Megaprojects by Edward G Merrow is essential reading, says Simon Murray.

Ed Merrow began his career as an academic at UCLA working on mathematical modelling.  He went on to become an analyst at the RAND Corporation and in1987 founded Independent Project Analysis Inc – a consultancy that evaluates investment projects for companies in the petrochemical, mining and industrial sectors.

Since 1987 Merrow and his colleagues have reviewed more than 300 megaprojects – defined as those with a total capital cost of more than US$1billion in 2003 dollars.  These projects are important to the companies that invest in them, the people that benefit from them and to the global economy.  And Merrow suggests that the number is growing and ‘they are failing at an alarming and unsustainable rate’.

Merrow measures the success of projects in terms of the degree to which the returns forecast in the original business case are delivered when the project goes into production.  And he uses statistical analysis to measure the correlations between the various characteristics of the projects and their outcomes.  It is a clinical analysis conducted without prejudice and backed up with a lot of pithy comments drawn from his personal experience.  For a dry subject it is a surprisingly good read.

The overall impression from this book is that industrial megaprojects are poor investments.  65% 0f the projects studied failed to meet their business objectives.  And there is an unexpected distribution of success with most project outcomes being very good or very bad with few projects in the middle.  Merrow calls this the Jemima Principle after the nursery rhyme that ends “when she was good she was very very good and when she was bad she was horrid”.

“Shaping errors and omissions are the most common root cause of megaproject failure”.

 Three chapters of the book are devoted to making the right business decisions before committing to a project.  Shaping is a business-led process in which the sponsors of an investment gather information, evaluate the attributes of a project and decide whether and on what basis to proceed.  And Merrow is scathing in his criticism of industrial companies for allowing their technical skills to be eroded to the point where they can no longer do this essential work effectively.  Companies have become too reliant on their consultants and contractors and too eager to commit to projects before they have a robust and tested business case.

“We tend to exaggerate the importance of contracting approach to project success or failure”.

A conclusion that will surprise many readers is that the contracting approach has little influence over the outcomes of industrial megaprojects.  No contracting approach guarantees success and most contracting approaches can succeed. What is much more important is the quality of the people and the effectiveness of the project organisation.  And Merrow is clear about the pitfalls in trying to use contracts to pass responsibility for project outcomes to contractors.  As he points out, contractors have neither the skills to manage these risks nor the balance sheets to absorb them.

The insights and observations in this book are applicable to large infrastructure projects and governments around the world would do well to heed Merrow’s advice and spend time shaping projects properly before committing to them. This book is essential reading for anybody who aspires to sponsor or deliver a large project.