Perspective on the Cost of Delayed Decision Making in Large Project Execution

Abstract

In this paper we will look at the cost impact of delay without a change in project scope
or project rework. This condition is most closely associated with general delay as a
result of:
 Extended decision making time frames by the project owner
 Project wide stop work orders from any of a variety of causes.
No loss of productivity from project disruption has been reflected except in the case
considered at the end of this paper (Figure 13) where lost productivity from retrograde
behavior of the site labor’s learning curve or production curve is specifically considered.
This differs from the so called “measured mile” approach often used in calculating
disruption impacts.
In actual project situations the cause of delay is often associated with changed scope
or rework and disruption and concomitant loss of productivity are real factors. The
simplified analysis presented here is intended to influence project decision making
processes by better dimensioning the cost of delay in establishing evaluation and
decision making time frames. The cost of a lack of timely decision making is seldom
reflected in project governance processes.

Full text

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 1
Perspective on the Cost of Delayed Decision Making
in Large Project Execution
Bob Prieto
In this paper we will look at the cost impact of delay without a change in project scope
or project rework. This condition is most closely associated with general delay as a
result of:
 Extended decision making time frames by the project owner
 Project wide stop work orders from any of a variety of causes.
No loss of productivity from project disruption has been reflected except in the case
considered at the end of this paper (Figure 13) where lost productivity from retrograde
behavior of the site labor’s learning curve or production curve is specifically considered.
This differs from the so called “measured mile” approach often used in calculating
disruption impacts.
In actual project situations the cause of delay is often associated with changed scope
or rework and disruption and concomitant loss of productivity are real factors. The
simplified analysis presented here is intended to influence project decision making
processes by better dimensioning the cost of delay in establishing evaluation and
decision making time frames. The cost of a lack of timely decision making is seldom
reflected in project governance processes.
The analyses in this paper have been based on unconstrained labor, equipment and
material factors which would act to further exacerbate the cost of delay. In general this
analysis represents likely minimum costs to be experienced by delay of a project.
“Ask of me anything but time”
-Napoleon

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 2
Figure 1 illustrates the monthly cost of delay, at the point in time such a delay occurs,
normalized as a function of the project’s initial estimate and duration. It considers the
impacts of escalation and general condition costs, which persist during the delay period.
In this example escalation throughout the project period was assumed to be
constant. This would represent the general contractor’s view on cost growth
associated with delay, excluding any impacts from disruption including lost learning
curve.
In evaluating the impact of delay, construction progress was assumed to follow a
traditional “S”-curve, with no progress made during the delay period. General conditions
cost were assumed to follow “S”-curve expenditure rates at a level equal to 10% of the
expenditure rate. During the delay period general conditions costs were assumed to
persist at the most recent monthly rate. Escalation was applied to uninstalled balances
for simplicity in modeling.
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
55.00%
60.00%
65.00%
70.00%
75.00%
80.00%
85.00%
90.00%
95.00%
100.00%
Figure 1- Monthly Cost of Delay
Monthly Cost of Delay

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 3
Table 1
Causes of Delay
Timely decision making by owner
Changed owner performance requirements (fit for purpose
redefined)
Intentional delay of project driven by business factors (market
conditions; competing factors requiring management attention;
cash flow or other financial market constraints)
Delayed or withheld regulatory approvals or changed regulatory
requirements
Technical challenges not anticipated
Events anywhere in the supply chain broadly impacting
progress
Figure 1 illustrates that the cost of delay, without disruption or loss of learning curve, is
greatest at the initial stages of the project when the greatest balance to be escalated
remains. The greatest impact actually comes at about 15% of original project duration
as general conditions costs ramp up faster than the remaining value subject to
escalation is reduced. The exact point in time is a function of the shape of the “S”-curve,
assumed escalation rate and general conditions costs.
Figure 2 considers the case where escalation grows throughout the project period.
Overall costs are significantly greater (nearly 2X) and the peak cost is realized
later (25% of original project duration) than that associated with level escalation
throughout the project period. As in Figure 1, the interplay between general conditions
cost, “S”-curve progress and escalation on the uninstalled amounts can be seen. All
other assumptions are consistent with the case illustrated in Figure 1.

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 4
Figure 3 illustrates the impact of project delay as a function of when the delay occurs (%
of original project schedule) for the case of declining escalation during the project
period. In this example peak delay cost is shifted to project initiation in part due to
the higher initial escalation rate used in this model (6% declining to 3.5%).
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
Figure 2 - Monthly Cost of delay
(Growing Escalation)
Monthly Cost of delay

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 5
Each of these first three cases adopts a cost view akin to that seen by a general
contractor. In reality though, owner’s delay costs are much more and must include the
weighted average cost of the capital they have committed to the project. These next
three cases include the owner’s cost of capital in assessing the total cost of project
delay. All other assumptions are consistent with those associated with Figures 1
through 3. Owner’s cost of capital is assumed to be applied to the installed project value
and thus tracks the project’s cumulative “S”-curve.
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
Figure 3 - Monthly Cost of Delay
(Decreasing Escalation)
Monthly Cost of Delay

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 6
Figure 4 relooks at the cost of a month’s delay as a function of when the delay occurs
(as a % of original project schedule) but now including the owner’s cost of finance.
Escalation is level in this case at 3% annually (compounded monthly). The weighted
average cost of capital (WACC) was based on a financing structure consisting of 15%
equity and 85% debt with 15% and 8% annual cost, respectively.
Several significant changes relative to the case illustrated in Figure 1 are important to
note:
 Overall cost of delay is significantly higher
 Peak delay cost shifts significantly in time to approximately 60% of the projects
original schedule versus a peak at about 15% of the project’s original schedule
when financing costs are not included.
 Cost of delay essentially does not reduce over time, rather it rises to just after the
midpoint of construction and remains at a high level as more installed project
cost must be carried until project startup.
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
Figure 4 - Monthly Cost of Delay
with Financing
Monthly Cost of Delay with Financing

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 7
Figure 5 relooks at the case shown in Figure 2 with the owner’s cost of financing
included. The earlier in time that a delay occurs, the more the total project cost
escalates versus an undelayed case. Peak monthly cost of delay is brought forward
versus the levelized escalation example shown in Figure 4 (40% of original project
schedule versus 60%) but still later than that seen in Figure 2 (25% of original project
schedule) where financing costs were excluded. While we do see some drop-off in
project delay cost over time it is not as significant as that reflected in Figure 2.
In this example we can also see the impact of overall higher project escalation versus
Figure 4 with peak values reaching 2.19% versus 1.45% of original project cost per
month of delay.
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
Figure 5 - Monthly Cost of Delay
with Financing
(Growing Escalation)
Monthly Cost of Delay with Financing

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 8
Figure 6 updates the case shown in Figure 3 to include the addition of the owner’s cost
of financing during a period of declining escalation. The sawtooth behavior is driven by
step changes in escalation rates that become less significant in driving the overall
shape of the curve as escalation builds. Overall delay costs measurably exceed those
observed in Figure 3.
It is worth directly comparing the monthly cost of delay for levelized escalation and
growing escalation (starting at the same level) with owner’s financing costs included.
1.40%
1.45%
1.50%
1.55%
1.60%
1.65%
1.70%
1.75%
1.80%
1.85%
1.90%
Figure 6 - Monthly Cost of Delay
with Financing
(Decreasing Escalation)
Monthly Cost of Delay with Financing

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 9
Figure 7 illustrates the importance of carefully modeling escalation for the entire project
period in order to better appreciate the true cost of delay that may be experienced.
The importance of more accurate escalation modeling is particular acute in the first half
of the project period but remains important in all cases considered.
Sensitivity to Delay Duration
Let us return now to the contractor’s perspective where escalation and general
conditions costs are considered but the owner’s cost of finance is not included. Looking
at a project example where escalation is level throughout the project period we can now
test the cost of delay for longer duration delays. In Figure 8, the cost of delay curves are
plotted for two, four and six month delays.
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
Figure 7 - Monthly Cost of Delay
with Financing
Levelized Escalation Growing Escalation

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 10
Delay costs associated with longer durations are higher, driven by continuing general
conditions costs and an extended escalation period.
Figure 9 provides a different perspective on extended duration delays by looking at the
average monthly cost of delay during the delay period in relation to the cost of a single
month of delay. While these costs have been plotted against original schedule
durations, these delay periods extend measurably beyond the original schedule and
thus the results reflected in Figure 8 are more useful in my view. Importantly, longer
duration delays are more deleterious especially when they occur at later stages of
project execution.
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
Figure 8 - Total Delay Cost
2 Month Delay 4 Month Delay 6 Month Delay

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 11
Sensitivity to Escalation Rate
We have seen the interplay of extended general conditions costs, escalation on
uninstalled balances and in the case of the owner’s perspective on the cost of delay, the
cost of extended financing period before revenue service. Figure 10 now looks at
sensitivity of the cost of delay to escalation rate. The particular case analyzed assumed
a constant delta between escalation rate and the weighted average cost of capital, in
effect reflecting a “real cost” of money. Escalation was assumed to be level throughout
the project period but a constant 3% escalation rate was used between the time of the
project estimate and the start of the project one year later in all cases.
0.80
1.00
1.20
1.40
1.60
1.80
2.00
Figure 9 - Normalized Monthly Cost of Delay
1 Month Delay 4 Month Delay 6 Month Delay

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 12
Three different points of delay have been considered, 25%, 50% and 75% of original
project schedule. As expected, delay costs rise with increasing escalation rates (2% to
8%), with earlier project phases (25%) more sensitive to escalation rate increase
than later project phases (75%). The interplay of general conditions cost, escalation
rate and WACC level influence the level and shape of the delay cost curves at each
project time point.
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
2% 3% 4% 6% 7% 8%
Delay Cost
Escalation %
Figure 10 - Sensitivity of Delay Cost to Escalation
Rates
25% 50% 75%

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 13
Sensitivity to Schedule Duration
In each of the cases considered to this point an original project schedule of 10 years
was assumed. Figure 11 now looks at the sensitivity of the monthly cost of delay to
original project schedule adopting the owner’s perspective with the cost of finance
included. The difference is significant and acts to highlight the importance of timely
decision making by the owner at all stages of the project. In that many project schedules
are shorter than the 10 years assumed in the prior analyses, the impact of delay is even
greater than that previously outlined.
The relationship of escalation and financing rates creates a maximum impact for a 6
year schedule duration given all other assumptions with a cost of delay approximately
5X what is seen in the 10 year schedule which was used in all prior cases evaluated.
From the owner’s perspective, the point in time at which the delay occurs is less
significant than the original schedule duration of the project.
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
4 6 8 10
Cost of 1 Month's Delay to Owner
Original Schedule Duration (Years)
Figure 11 - Monthly Cost of Delay
(Owner's Perspective)
25% of Original Schedule 50% of Original Schedule 75% of Original Schedule

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 14
The General Contractor’s view of delay cost as a function of original schedule duration
differs from that of the owner since he does not experience the financing costs that the
owner incurs. Figure 12 looks at the comparable delay cost versus schedule duration
from the contractor’s point of view. The absence of financing costs in delay cost
considerations eliminates the duration related maxima observed by the owner. For the
contractor, the cost of a month’s delay decreases as a percentage of original project
cost as project schedule grows in duration.
Unlike the owner, the contractor’s view is more sensitive to when the delay occurs with
early delays being more significant (ignoring impacts on productivity) because of the
higher levels of escalation he experiences. These differing views are reflected in the
contractor’s desire to receive necessary approvals from the owner to proceed full speed
ahead.
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
1.80%
2.00%
4 6 8 10
Cost of 1 Month's Delay to Owner
Original Schedule Duration (Years)
Figure 12 - Monthly Cost of Delay
(Contractor's Perspective)
25% of Original Schedule 50% of Original Schedule 75% of Original Schedule

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 15
Estimating the Impact of Delay on Productivity from Retrograde Learning Curve
Estimating the impact of delay on productivity is the subject of extensive research in the
engineering and construction industry. In such estimates principal factors to be
considered include:
 The traditional learning curve or production function that best characterizes
uninterrupted productivity improvement as the project progresses
 The maximum productivity rates realized as it relates to average productivity
 The amount of learning curve and therefore associated productivity rates during
the delay period
For purposes of better dimensioning the cost of delay by including the increased cost
associated with lost productivity from a retrograde learning curve we constructed a
simple model of productivity over the project’s duration. It is not intended to suggest that
this is an accurate representation applicable to all major engineering and construction
projects but rather a reasonable first approximation for purposes of this cost of delayed
decision making analysis. The approach used differs from the so called “measured mile”
approach by specifically including a loss of learning curve during the delay period. For
purposes of this analysis we assumed:
 Productivity during the first 5% of the project was at 50% of average productivity
 Maximum productivity is 150% of average and was reached at 50% of the project
schedule
Average productivity was calculated as being achieved at 43% of the project’s original
schedule based on the above assumptions
The impact of delay on productivity was calculated as the loss of productivity based on
50% of the difference between the productivity rate at the time the project delay began
and the productivity rate at an earlier period of time determined by subtracting the delay
duration to model a loss of learning curve. This lost productivity factor was then
modeled as increased labor costs over a period of time equal to the delay duration.
Labor costs were assumed to represent 40% of period expenditures based on
experience in the heavy civil industry.
Project delays within the first 5% of project duration were assumed to have no impact
while those after peak production had been reached assumed to decline to values
associated with the period prior to peak production being reached.

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 16
Figure 13 illustrates the percentage growth in delay cost as viewed by the owner (cost
of financing included) as a function of delay duration and timing. The modest values
reflect the conservative modeling of disruption and an absence of rework or constraints.
The cost of delay growth experienced by the contractor will be a higher percentage
since it will be added to a smaller cost of delay that ignores growth in financing cost. By
comparison, the contractor will experience a 6.45% growth in the cost of delay at the
midpoint of the original schedule in the case of a 6 month delay. This compares with the
4.37% growth as seen from the owner’s perspective.
100.00%
101.00%
102.00%
103.00%
104.00%
105.00%
Figure 13 - Delay Cost Growth to Owner from
Lost Productivity
1 Month delay 2 Month Delay 4 Month Delay 6 Month Delay
“…loose not an hour”
-Nelson

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 17
Summary
Timely decision making is essential to effective project execution and lack of strong risk
and cost based governance processes can have significant impacts in overall costs
experienced by both the general contractor and owner. These impacts are a function of
many factors including:
 Baseline project cost
 General escalation level
 Change in escalation rate over the project performance period
 Level of general condition costs
 Proportion of project costs subject to learning curve effects
 Weighted average cost of capital
 Delay duration
 Point in time when delay occurs
The perspectives of the contractor and owner differ significantly on the total cost of
delay but governance processes intended to promote the owner’s interests would be
well served by adopting the more comprehensive cost view of the owner as described in
this paper.
A $ 4 billion project (not uncommon in the world of large infrastructure and industrial
projects) subject to a delay of one day in decision making would increase an owner’s
cost by $10 million. Was the day lost in decision making worth it?

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 18
References
1. The Cost Of Delay And Disruption; Roger Knowles
2. Understanding the causes and consequences of disruption and delay in complex
projects: how system dynamics can help; Susan Howick, Fran Ackermann, Colin
Eden and Terry Williams
3. Delay and Disruption Analysis on Technology-Driven Projects; Clay Ryals;
Navigant
4. Delay, Disruption and Acceleration Costs; Patrick Weaver FAICD, MCIOB, PMP
5. Lost Productivity: Claims for the Cumulative Impact of Multiple Change Orders;
Reginald M. Jones
6. The effects of design changes and delays on project costs; WILLIAMS, Eden,
Ackermann, and Tait (1995); Journal of the Operational Research Society 46, 7,
809-818
7. Use of a Production Function to estimate the impact of work fragmentation on
labor productivity; Gerald H. Williams, Jr.; Construction Research, Inc.
8. The GIGA Factor; Program Management in the Engineering & Construction
Industry; Robert Prieto; CMAA; ISBN 978-1-938014-99-4; 2011

PM World Journal Perspective on the Cost of Delayed Decision Making
Vol. III, Issue II – February 2014 in Large Project Execution
www.pmworldjournal.net Featured Paper by Bob Prieto
© 2014 Bob Prieto www.pmworldlibrary.net 19
About the Author
Bob Prieto
Senior Vice President
Fluor
Princeton, NJ, USA
Bob Prieto is a senior vice president of Fluor, one of the
largest, publicly traded engineering and construction
companies in the world. He is responsible for strategy for the
firm’s Industrial & Infrastructure group which focuses on the development and delivery
of large, complex projects worldwide. The group encompasses three major business
lines including Infrastructure, with an emphasis on Public Private Partnerships; Mining;
and Industrial Services. Bob consults with owners of large engineering & construction
capital construction programs across all market sectors in the development of
programmatic delivery strategies encompassing planning, engineering, procurement,
construction and financing. He is author of “Strategic Program Management”, “The Giga
Factor: Program Management in the Engineering and Construction Industry” and
“Application of Life Cycle Analysis in the Capital Assets Industry” published by the
Construction Management Association of America (CMAA) and “Topics in Strategic
Program Management” as well as over 475 other papers and presentations.
Bob is a member of the ASCE Industry Leaders Council, National Academy of
Construction and a Fellow of the Construction Management Association of America.
Bob served until 2006 as one of three U.S. presidential appointees to the Asia Pacific
Economic Cooperation (APEC) Business Advisory Council (ABAC), working with U.S.
and Asia-Pacific business leaders to shape the framework for trade and economic
growth and had previously served as both as Chairman of the Engineering and
Construction Governors of the World Economic Forum and co-chair of the infrastructure
task force formed after September 11th by the New York City Chamber of Commerce.
Previously, he served as Chairman at Parsons Brinckerhoff (PB), one of the world’s
leading engineering companies. Bob Prieto can be contacted at Bob.Prieto@fluor.com.