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Can PMC take full ownership of a project?

PMCs are always asked to take full ownership of projects, but is this a risky move? With the right approach, PMCs can successfully navigate the challenges of owning a project and delivering successful outcomes.
Data-Driven Decision Making, Design and Construction Management, Engineering Project Management, Lean Organization, Project Delivery Models, Project Management, Risk and Reward, Smart Project Management, Timelines and Budget

PMCs involved in building construction had, in the past, earned a bad reputation in India. We have come across many owners and developers who tried the PMC model at their projects and had such a bitter experience that they resolved not to engage PMC again. Instead they modified their strategy to have their own team for managing their projects.

The Pain Point

Many leaders from these organizations said that the PMCs acted just like postmen, carrying information from the one stakeholder to the other and adding very little value. Many were blunt enough to ask, ‘what does a PMC contribute to our project except giving excuses for the failures?’  The root cause of the problem may have been within their own organization and could be any of the following:

• Unrealistic expectations from the project
• Ineffective process of appointing various service providers
• Lack of alignment between authority and responsibility
• Appointing the lowest bidder thus not allowing deployment of adequate resources

The Gamechanger

Then the world (and the real estate sector) was hit by the covid pandemic. All organizations suffered regardless of their size, geography, sub-sector, number of projects, model adopted for project execution etc.. Many organizations had to drastically downsize their teams.

A few organizations earned a bad name in the context of how they handled their human resources during the pandemic. Sacking the employees, though essential for survival was a very traumatic experience for many. Inefficiencies in their self-performing Project Management Processes, hitherto hidden by physical and commercial progresses surfaced. When the time came for re-starting the business post covid, many developers were averse to the self-performing model of Project Management and instead started once again exploring the idea of outsourcing PMC.

Rethinking the Strategy

However, having had poor experience with PMCs in the past, the developers now want to ensure that the Project Management team has enough ‘skin in the game’. During discussions and negotiations, the PMC is often asked whether they are willing to take full ownership of the project’s timelines and budget.

The next logical question that follows is, if the PMC agrees to take the ownership, how they would structure the deal to demonstrate the same. To put it bluntly, the owners / developers want the Project Management to tie their fees to the project outcome. Some owners create schedule of payment of fees to the PMC, which is partly linked to the progress of the project. While this appears a practical and reasonable expectation, it is really not so. Let us examine this in greater depth and identify issues that can cause grief to either or both parties.

Who sets the goal? Before a PMC takes ownership of the timelines and budget, the target date of completion and project cost should be mutually agreed. This is possible only if the planning and design of the project has advanced to a stage where time and cost can be estimated with reasonable confidence. Alas, a utopian situation in the context of real estate projects in India.

Who has all information for effective decision-making? In any project, decisions are not based only on expenditure or cost considerations. Many issues, which go beyond the project boundaries, can influence the decisions. These include changes in the business sentiments, issues affecting brand and strategy of the owner, sales velocity etc. The Project Management team is typically not fully aware of these issues and may take decisions which are correct from a construction perspective, but not from business perspective.

Who causes changes? Changes in requirements, specifications, sequence of delivery all are invariably caused by the owner (or the ultimate customer). Unless a robust process is in place to assess the impact of any such change on the project’s timeline & cost, the Project Management team has little option but to meekly succumb to the demand of the customer. Explanations after the delays and cost overruns have hit the project are seen more as excuses than justification! In all such cases, the owners must bear all delays and costs, but that’s not always the case. Contracts are usually unfairly drafted favouring the owners and the PMC runs the risk of losing out on a legitimate protection, if not a claim.

Who is best placed to shoulder greater risks? In the final analysis, it all boils down to the question of apportioning project risks (construction related). It is fair to suggest that the risk and reward should be proportional. Also, involved stakeholders should be burdened with the risks in ratio of their stakes. It is clear that the ratio of stakes in a project is typically highest for the owner, then for the contractor(s) and lastly the project management consultants and other engineering services. Expecting the PMC to take the highest risk goes against this logic. If the project suffers from a force-majeure event (such as the covid pandemic), the PMC will be unable to bear the losses and will simply go bankrupt. The pain and loss will ultimately be borne by the owner, but after the avoidable death of the PMC!

A Possible Solution

So, what is the way out? In our opinion, the most effective way forward is for the owner to develop a lean organization competent to manage multiple consultants. They need to create a framework that helps them appoint a professional PMC with a balanced apportioning of business risk. Considering the fact that the fees to be paid to the PMC is a fraction of the project cost, trying to save expenditure on PMC related expense will be a penny wise but pound foolish approach.
A quick summary of the approach that might work well constituted a few coordinated actions.

1. Hire internal Project Controls team, tasked to manage external engineering service providers.
2. Run efficient processes. Allow service providers to control the project through operational and tactical decisions. Retain control of strategic (and commercial decisions) in-house.
3. Apportion risk-reward in line with contribution to project cost. Drive by reward, not only by risk.
4. Give up lowest bidder outlook for all decisions and operations. Service providers need to ensure their own survival before they can contribute to the project.

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