What is Project Oversight
Project oversight is the process by which owners, shareholders, or their agents oversee projects performed on their behalf by a contractor. The term “contractor” refers to the principal entity obligated to execute the work under a binding agreement, whether internal or external.
While the concept and proper execution of project management is well-defined in the globally accepted book on the subject, A Guide to the Project Management Body of Knowledge (PMBOK® Guide), there is little literature on the concept and proper execution of owner oversight of capital projects. The Project Oversight Guide (POG) explores and explains the principles, best techniques, and proven practices for mastering owner oversight. The POG treats owner oversight of projects as a unique discipline.
The best capital projects establish a clear understanding of the relationship between owner oversight and the project team ahead of project execution. The project management organization needs to know the role of oversight, how oversight will be conducted, what to expect, and how issues will be handled. To this end, the POG provides a framework of best practices that owners and contractors can use to tailor a common understanding of the owner’s oversight role.
Although the foundation of trade rests on the assumption that reputable parties engage in commerce as a win-win proposition, even with the best of intentions, projects do fail. In 2016, a study conducted by PricewaterhouseCoopers found 97% of organizations believe project management is critical to organizational success and business performance.1 Despite this, the reports below illustrate that poor project performance is a significant problem.
- In 2013, PMI’s Pulse of the Profession® reported, “research, which is consistent with other studies, shows that fewer than two-thirds of projects meet their goals and business intent (success rates have been falling since 2008), and about 17 percent fail outright.”
- In 2016, for every $1 billion invested in the United States, $122 million was wasted due to lackluster project performance. This was a 12% rise over the previous year, demonstrating a growing industry-wide problem.2
When a project fails, the owner shares in the responsibility of that failure. By distinction, the measures of a project’s success or failure from an owner’s perspective are not the same as those contracted to perform it. This difference in expectations inevitably leads to differences in incentives, risk management, and decision-making behavior. Table 1.1 below illustrates how owners and contractors are likely to be motivated by different project objectives.
Table 1 – Differences in Owner and Contractor Motivations
- Project not abandoned by contractor
- Realize future benefit of the project
- Realize future value of the project
- Meet schedule requirements
- Maintain reputation
- Minimize impact of change requests
- Broadly interpret project scope
- Conservative change request estimation
- Advocate for owner interests
- Validate contract compliance
- “Trust but verify” contractor performance
- Minimize owner’s risk burden
- Advocate for owner interests in disputes
- Initiate legal claims in the owner’s interest
- Negotiate settlements in owner’s favor
- Meet profit objectives
- Extend knowledge and expertise
- Extend staff learning and growth
- Extend market penetration
- Generate future business
- Develop future project innovation
- Maintain performance track record
- Maximize change request revenue
- Narrowly interpret project scope
- Liberal change request estimation
- Control costs
- Minimize stakeholder interference
- Maintain productivity rate
- Minimize rework
- Maintain project autonomy
- Minimize contractor’s risk burden
- Advocate for contractor interests in disputes
- Initiate legal claims in the contractor’s interest
- Negotiate settlements in contractor’s favor
Table 1 highlights the importance of owner-oversight as a way of managing the tension between the differences in objectives:
- Owners should understand that the tensions caused by these imperfectly aligned objectives occur even when both parties are operating in good faith.
- Owners should be reasonable when advocating for their interests and expect the same reasonableness in return.
- Owners should expect project management teams to act consistent with their incentives.
- Owners should anticipate that there will be circumstances in which the contractor will make decisions that are contrary to the owner’s interests.
- Owners should expect the project management team to be loyal agents of their principal (i.e., the contractor) and advocate on behalf of their principal’s interests.
- Likewise, owners should expect their oversight team to zealously advocate on their behalf.
The consequences of project failure are also often not the same for the owner and the contractor. An owner may have to "invest the farm" to finance a project. The project may be critical to the company's future survival. Failure could spell the company's demise. Whereas, a single under-performing project or project failure is not as likely to pose an existential threat to a major general contractor; their project team may very well document the lessons learned and move on to the next project.
Furthermore, using a contractor does not necessarily insulate owners from being held responsible for the contractor's actions. This is foundational to understanding why owners have the authority to oversee work performed on their behalf and should exercise that authority in good faith. In the case Snyder v. SCE 1955, the California Supreme Court ruled owners bear the ultimate responsibility and liability for compliance with safety rules and regulations and could not delegate that responsibility to the contractor.
|Oversight Insight: Snyder v. SCE
|Snyder v. Southern California Edison Co.
44 Cal.2d 793, 799-801 (1955)
Employees of an independent contractor performing work on behalf of Southern California Edison Company (SCE) incorrectly installed a utility power pole at a depth of 4 feet instead of the required 6 1/2 feet. The pole fell on a worker who suffered major injuries. Although an SCE inspector oversaw the installation, the SCE inspector neglected to verify the installation depth of the pole.
The California Supreme Court held SCE liable for the injuries on the basis that California Edison had a nondelegable duty to see that the poles were set as required by law. In so holding, the court noted that the statutes were promulgated for the safety of the workmen as well as for the public. The court reasoned that since construction and maintenance of lines, including poles, is a necessary part of the utility’s business, these tasks may not be delegated without an express provision permitting such delegation. In that case, the California Supreme Court ruled that the duty imposed on a utility could not be delegated to an independent contractor to insulate the utility from civil liability.
In other words, public utilities in California bear the ultimate responsibility and liability for compliance with safety rules and regulations. This responsibility or liability cannot be passed on or transferred through a contract with an independent contractor. The utility is responsible for ensuring that work which is a necessary part of the utility’s business must be performed in compliance with regulation, regardless of whether the work is performed by the utility or the independent contractor it hires.
Successful Owner Oversight
A project oversight program is not one-size-fits-all and must be appropriately negotiated with the general contractor and adjusted based on best practices, project size, budget constraints, and the specific environment. Determining the appropriate level of oversight implementation is referred to as project "tailoring".
When done right, an efficient owner-oversight organization, staffed with quality oversight professionals, pays for itself and is a net positive benefit to the owner. It may also be a net benefit to the contractor, when the contractor operates as a learning organization. Below are three key concepts for a successful owner-oversight program that are covered in detail in the POG.
1. Foundational Elements
A successful owner-oversight organization ensures the owner's interests in the foundational elements are fairly represented through the exercise of the owner's inherent oversight authority. The foundational elements are discussed later in a later article and listed below:
2. Balancing Constraints
A successful owner-oversight organization advocates on the owner's behalf and ensures the project considers the interests of the owner when balancing the following competing constraints.
3. Structure & Strategy
A successful owner-oversight organization understands the limitations of its mandate and understands when and how to exercise their oversight authority. Successful owners design and tailor the organization to suit the specific circumstances. Below are some structural and strategic considerations when creating and sustaining an owner-oversight organization that are covered in this guide.
- Project governance
- Contract design
- Contractor interface
- Organizational structure and design
- Organizational interface behaviors
- Organizational learning behaviors
- Framework of processes and procedures
The best-practice processes for owner oversight of capital projects are not covered in the PMBOK. To be successful owners adopt a suite of governing processes specific to the oversight role. Table 2 shows a list of processes for owners to consider. Each of these processes are covered in detail in the POG.
Table 2 – List of Oversight Processes
1 Project Management Institute, “The High Cost of Low Performance,” PMI’s Pulse of the Profession®, 8th Global Project Management Survey 2013 (2013): 4.
2 Project Management Institute, “The High Cost of Low Performance,” PMI’s Pulse of the Profession®, 8th Global Project Management Survey 2016 (2016): 5.