Researchers from the University of Stavanger, University of Melbourne, and University of Wisconsin-Madison have published a new paper in the Journal of Marketing that examines how major projects undertaken by temporary organisations can be better managed so that cost overruns are minimised.
When consumers return to the skies again, they may do so in Boeing’s 787 Dreamliner. But the project, or ‘temporary organisation,’ created to make this plane a reality ran over-budget and created significant dissatisfaction among Boeing’s customers.
These cost overruns are a common outcome of major engineering and construction projects. In fact, studies show that nine out of ten have significant cost overruns, with overruns above 100 per cent quite common.
The implications of cost overruns go beyond financial metrics and can include reputational damage, litigation, and future overreliance on rigid and formalised relationship features.
Managing suppliers and subcontractors, who can run into the hundreds in major projects, is an enormously difficult task. It necessitates considerable coordination and monitoring in a context where parties often have not worked together, they lack shared procedures or rules, and there is a great need to get up to speed quickly.
As one of Boeing’s engineers put it, “The importance of thorough planning, accounting for all interdependencies, cannot be overestimated.”
Through studying 429 completed construction projects, the researchers found that supplier selection and pricing format decisions that reflect key characteristics of the project, such as the size of the project, duration, and type of customer, are best at reducing a significant part of the cost overruns observed.
They conducted ‘what-if’ analyses to show that the reductions in costs can be substantial.
Ghazimatin added that through the research, “We also show that the benefits from getting selection right outweigh those that result from getting pricing right, suggesting that selection should be, relatively speaking, a higher strategic priority for a firm.”
The study is particularly useful to managers who wish to minimise cost overruns in projects. Pricing and selection decisions, which are typically fixed at the start of a project, are predictive of cost overruns that can only be observed after a project is completed, typically after many months or years.
The pricing and selection aspects studied – fixed vs. variable pricing and selection on price vs. ability – were proposed by industry representatives and thus have direct managerial relevance.
Results also show that simple managerial heuristics, such as only relying on price-based selection or deploying fixed pricing, are unlikely to be effective at minimising cost overruns.
The study forthcoming in the Journal of Marketing is titled Mobilizing the Temporary Organization: The Governance Roles of Selection and Pricing and is authored by Elham Ghazimatin, Erik Mooi, and Jan Heide.
Full article and author contact information available at: https://doi.org/10.1177%2F0022242920982545
Original article written by Matt Weingarden from the American Marketing Association.
Note: Content has been slightly edited for style.