Improving cost certainty on rail megaprojects

Recent federal and state government reviews have reshaped Australia and New Zealand’s rail development landscape. As we manage demand for public funding, it’s more important than ever for major projects to have budget certainty and effective cost control throughout project delivery, says Ken Bagget, AECOM rail leader for Australia and New Zealand.

Over the last three years, what was once a robust pipeline of large active projects has encountered disruptions, delays, and cancellations. Intensified competition for public funding has seen governments redirect infrastructure investment, diverting resources towards critical areas such as energy transition, affordable housing, and healthcare.

AECOM works with clients around the world to deliver complex transit and intercity rail projects, including light rail, fast rail and metro and underground rail. Cost control is front of mind for all, and in this article, we explore four common challenges and potential ways to address cost escalation on rail mega projects.

1/ Early Government commitment: setting up for success

Early concept and project development work, including the initial budget, requires more than excellent knowledge in estimating the actual cost to deliver the project scope – it also means looking at the broader landscape.

Transit projects can be inherently political and are impacted by many factors. When forecasting, it’s important to understand the funding models at play and which projects are fully and partially funded. In the heat of the Australian and New Zealand marketplace, we need to consider the pipeline of projects and how that will impact resource availability and cost. The industry needs to be able to focus on projects with definitive delivery timelines, such as the 2032 Olympics and Paralympic Games-related transit infrastructure, which helps us map and forecast the pressure on resources and materials that may change project risk and cost profiles. With more definitive timelines and clearer funding models, the Games projects generate more cost certainty because of the greater industry focus and commitment through the procurement phase.

John Barker, Global Major Project and High-Speed Senior Director at AECOM, emphasises that a robust strategic business case is essential to secure political and wider stakeholder support.

“Cost estimates should be based on well-developed solutions to drive certainty into funding estimates. This requires a credible operating model with clear scope definition and a strong funding envelope aligned to both direct revenue and wider economic benefits. Clear definition of service requirements and infrastructure scope enables credible revenue, capital, and operating cost estimates.”

At the concept stage, it’s also important to articulate the project delivery model as clearly as possible. At one end of the spectrum, we have an alliancing framework, which creates more equitable risk sharing, and at the other is a design and construct framework, which can offer lower prices upfront but little flexibility with design variation and a higher risk of cost blowout.

2/ Value for money and price certainty – choosing the right competitive selection process

Competitive tendering is important for creating value for money by having the industry respond to client project documentation. The industry’s ability to respond effectively is a function of the market documentation quality, the amount and quality of stakeholder engagement, and the contractual framework. Industry-led innovation can sometimes inadvertently result in a different or lower quality product than the client expects if it is not prevented by the competitive tendering framework.

Increasingly, some client agencies are developing very high-level reference designs to better define the final product’s outcomes. This approach can leave more targeted elements of innovation for the private sector to explore. A well-defined reference scope typically means clients spend more money on the reference design and less on a tender design. A good reference design should lead to more cost and product certainty. A clear and well-developed reference design, with scope certainty, also opens the possibility to collaborative frameworks, allowing clients to consider competitive alliance and even single alliance selection processes.

Where clients select a single proponent (‘pre-tender’) through an alliance selection process, the project scope, cost, and risk can be developed in a more direct engagement process with the client and any key stakeholder. This process offers the additional client-side benefit of putting much less pressure on the stakeholders in terms of personnel to support the development and delivery of the project. With this model, the smarts are often in constructability and targeted design innovation, leading to project delivery and cost certainty.

Cost escalation is common in rail megaprojects in brownfield environments as the project must manage the impact of construction on the community, integrate with existing infrastructure and utility services, and consider potential environmental or contamination issues.

3/ Increasing flexibility with the right framework

Systems assurance plays a key role in successful delivery, and effective systems assurance should streamline processes to ensure unnecessary design activities to get packages approved don’t impact a project’s design and delivery. The delivery team should focus on activities that support getting the project built and commissioned. In the rail sector, onerous systems assurance processes can take a lot of design effort and divert efforts from mainstream activities that are core to the project.

We’ve seen a shift towards alliancing in Australia, and this framework gives the ability to add or adjust project scope and still achieve value for money. Typically, when the cost of a project increases, it’s very hard to say it’s a value-for-money proposition. With an alliancing framework, you can have an open dialogue on risks and costs and make proactive investment decisions to enhance project outcomes. These decisions are fully client-endorsed progressively throughout the project.

Alliances are the only contract framework that allows contract merging under extenuating delivery circumstances. On rail megaprojects, contract interfaces between various major contract packages are potential sources of risk and program and cost growth. Projects around Australia and New Zealand manage these interfaces through different contract packaging and model strategies. In Melbourne, using an alliance contract to deliver one mega project has allowed two major contracts merging that would not have been possible under any other framework. This is providing more certainty of delivery and out-turn cost.

Systems assurance and early system and project requirements alignment are critical to successful project delivery. Collaborative frameworks can better manage the rationalisation and certainty of all requirements at the front end of the project to maximise the likelihood of successful delivery. The delivery teams can then focus on activities that maximise the ability to get the rail system built and commissioned.

4/ Rationalisation of standards

Addressing complexity early is one of the most valuable lessons to take into projects. As projects adapt to our society, the scope of megaprojects has started to extend beyond traditional standards, creating gaps between traditional standards, new situations, and rapid changes in the technology we’re applying or customer’s expectations.

Derogations to rail authority standards, which are situations where you can’t meet the strict requirement of the standard, add complexity to an already intricate project. Derogations often add cost and require compromise across the project to find a solution. However, addressing derogations earlier in the delivery lifecycle enables the most effective and affordable outcome.

Ultimately, we want to understand the implications of any conflict in requirements as early as possible so that we can find a solution that will work for the maintainer and operator of that system for 100 years.

Rail projects are complex operating systems with many moving parts. Cost certainty is a combination of many things, but government commitment, interactive procurement processes, high-quality documentation and clear assurance processes are critical to ensure success.