Governance for construction projects – these five criteria determine success

Large construction projects repeatedly fail due to the same problem. There is a lack of appropriate governance. The reform commission of the then Federal Ministry of Transport and Digital Infrastructure already stated this in its final report in 2015:

“The client’s expertise, but also the management expertise in companies, does not always meet the requirements of a major project. In addition, the organizational structures of clients and contractors often lack a clear definition of responsibilities, decision-making powers, decision-making paths and deadlines.”

What does “governance” mean?

DIN ISO 21500 defines governance as a framework from which an organization is directed and steered. At the heart of project organization is the answer to the question: Who does what, when and how? Governance is of fundamental importance for a clear organizational structure and creates a clear understanding of the roles and responsibilities of those involved in the project. The success of a major project depends not only on a clear distribution of responsibilities, but also on flexibility, creative and individual problem-solving and fast decision-making. Slow decision-making processes can lead to obstacles in planning and construction and jeopardize the project goals. On the other hand, the quality of decision-making and the documentation of the reasons for decisions must be adequately ensured.

Five Criteria for appropriate governance

The design of governance must be aligned with the specific requirements of the respective project. The following five criteria offer assistance:

• Discharge of management: Governance should ensure the management’s ability to act for the core business. In addition, the management must not be exposed to liability risks for issues that do not fall within its core competence.
• Technical and decision-making competencies: Governance should ensure sufficient technical expertise and decision-making ability among the company’s employees who are authorized to make decisions.
• Tasks, processes and decision-making channels. Responsibilities must be clearly assigned, processes clearly defined and decision-making paths clearly regulated. Governance should enable the client to make quick but also reliable decisions in order to avoid delays in the project for which the client is responsible.
• Capacities: Governance should do justice to the client’s existing management capacities. Otherwise, the need for external support should be examined and decided at an early stage.
• Controlling and monitoring: Governance should ensure that project development is controlled (comparison of planned and actual values, differentiated cost and risk analyses, highlighting the necessary management requirements) and that key project decisions are monitored and documented.

The right structure for the governance of a construction project

Based on these criteria, a project-specific decision must be made as to how the governance of the construction project is to be structured. The following basic structures can be used here:

Line structure not appropriate for larger construction projects

In a line structure, the construction project is handled organizationally like a normal business transaction within the existing organizational structure. This requires the least effort, as existing structures and processes can be used. This can be the right choice for smaller projects. For large projects, however, the line structure very quickly reaches its performance limits and is not recommended. The majority of companies are divided into individual business units to which certain responsibilities are assigned (e.g. purchasing, legal, procurement, construction, finance). The divisions are hierarchically subordinate only to the management. All business divisions exist side by side in a “line” and work on the topics assigned to them. However, a major construction project is not a normal business process for most companies. The existing line structure is not designed for this. The large number of tasks in connection with the major construction project, in addition to normal business operations, quickly becomes so great that they can no longer be completed on time and properly within the line organization. In addition, numerous decisions require the involvement of other business units, as there are many dependencies. It is possible for the business units to report to and coordinate with each other. However, this process is designed for consensual decision-making, is labor-intensive and slow. Each business unit pursues its own topics and sets corresponding priorities. The overarching project interests are easily lost from focus. In practice, unnecessary conflicts arise which then require a decision by the management and hinder the progress of the project.

Project organization structure enables efficient decisions

Due to the limitations of the line structure outlined above, the creation of a tailored project organization structure should be considered prior to a construction project. This applies all the more the more extensive and complex the construction project is. The project organization structure is set up with a view to the special requirements of the construction project. The company puts together a core team of technically competent and experienced employees from the business areas concerned, who are authorized to make decisions and are available in every project phase. This core team is responsible for the project, represents the interests of the project and coordinates the business units with regard to the construction project. With regard to the decision criteria described above, this variant offers several advantages:

• Relief for management: The management does not have to deal with individual questions about the construction project and can concentrate on the core business.
• Specialist and decision-making competencies: The project organization structure focuses on the project and pursues the interests of the project as a whole; it can find better solutions for the project than the departments within the line structure, each of which focuses on the task of its own department.
• Tasks, processes and decision-making channels: The project organization unit as the direct recipient of information shortens the transfer of knowledge. The project organization structure gives the core team authority to issue instructions. This allows actions to be better coordinated and dovetailed in terms of content and timing. Decision-making in the project organization structure is much faster, as conflicts do not always have to be escalated to the management.
• Capacities: In the case of project implementation via the line structure, the specialist employees have dual functions in normal business operations and in the construction project. The capacities for the construction project must be obtained from the business units on a case-by-case basis. This often does not work in the short term and leads to delays. In the project organization structure, however, capacities for the project can be secured and scheduled at an early stage.
• Controlling and monitoring: The information required for controlling the progress of the project and for monitoring key project decisions can be consolidated in the project organization structure and transmitted to the management in clearly defined processes. This not only makes controlling easier. In fact, the consolidation of information from the various business areas via the core team regularly allows the management to fulfill its monitoring duties. It may also be advisable to provide the management with external expertise in the form of a construction expert who reviews decisions made by the project organization unit and evaluates the project for the management on an ongoing basis.

Project company requires initial effort to relieve management as much as possible

The more extensive and complex the project, the more likely it is that a separate company will be established for the implementation of construction projects. A corresponding trend can be seen on the market. Examples include the construction companies of the umbrella organization Bauvorhaben Hochschulmedizin Niedersachsen (DBHN) – the construction company of the Hannover Medical School (MHH) and the construction company of the University Medical Center Göttingen (UMG), München Klinik Bau Projektgesellschaft mbH, BVG Projekt GmbH and Fraport Ausbau Süd GmbH. A project company is a temporary organization that has the purpose of implementing one or more projects and is given the corresponding decision-making powers. It is usually subject to self-management and should be staffed with experienced functionaries from the client and, if applicable, the financiers and users. The project company has the task of making project decisions, concluding contracts and subscribing and controlling the funds. The establishment of a project company involves an initial outlay. It is therefore generally only worthwhile for large construction projects or several similar projects. With regard to the decision criteria outlined above, this option can offer the following additional advantages over an internal project organization structure:

• Relief for management: The project company can be structured in such a way that the management of the parent company only needs to be involved selectively and can otherwise concentrate on the core business. The pressure on the management to make decisions on the construction project is further reduced.
• Technical and decision-making powers: The management of the project company is given extensive decision-making powers. The employees of the project company can concentrate exclusively on the realization of the new construction project and build up a high level of expertise.
• Tasks, processes and decision-making channels: The internal law of the project company can be tailored to the individual requirements of the construction project. Internal law includes, for example, the articles of association and internal guidelines.
• Capacities: The burden on the management of the parent company is greatest when a project company is established. The management only has to become active as part of its supervisory duties as a shareholder of the project company. Only the project company is operationally active.
• Controlling and monitoring: The project company can take over operational project controlling with specialized employees, as these employees do not have to perform any tasks within the line structure.

Conclusion

Clear and customized governance is crucial for the success of construction projects, especially large-scale projects. It ensures quick decisions, clear responsibilities and relieves the burden on management. While the line structure is sufficient for smaller projects, a project organization or project company offers more flexibility and control for more complex construction projects. The right choice of governance structure minimizes risks, speeds up processes and significantly increases the chances of success.