1 Jan, 2019

How Project Governance Affects Decision Making

As a project manager, you will be challenged to make many significant decisions in your career. Whether you are an early career project manager or senior project manager, it pays to understand how project decisions are made. All projects have a governance structure that guides project decision-making. Some questions you may come across are as simple as, “Do you have the authority to make a certain decision?” Others are more challenging, such as, “Will the implementation of a decision add to or reduce project value?”

This article discusses petroleum industry governance practices and procedures that will help you answer the following:

Who are the decision-makers and decision influencers?

What is the project and organization decision structure (pathway)?

How is risk controlled through delegation of authority?

How is risk controlled through delegation of authority?

How is decision-making is guided by project processes, standards, procedures and guidelines?

 

The figure below exhibits the components of governance that are critical in project decision making.

 

GOVERNANCE: STAKEHOLDERS

More than ever, project decisions have far-reaching impacts on the environment, local cultures, nearby communities and regional infrastructure. Government requirements for studies, permits and information have never been greater. Effective stakeholder management is necessary to meet these requirements and achieve successful project outcomes. The types of stakeholders you will need to manage are:

Internal Stakeholders - Approved members of the project program who have a formal, official, or contractual relationship with the organization.

External Stakeholders - Not formal members of the project development, but may affect or be affected by the project.

 

 

As you can see, there are a lot of people and groups who want to be a part of decisions that are made on a project. Very large, complex projects attract more interest than smaller facility upgrade projects. In either case, those who have 1) authority to review a decision recommendation or 2) the authority to decide, must be clearly identified.

For more insight on how to manage project stakeholders, read How to Effectively Manage Project Stakeholders.

 

GOVERNANCE: ADVISORY COMMITTEES AND SUBJECT MATTER EXPERTS

The Project Decision Board or Decision Maker relies to a large extent on others to ensure that recommendations that come before him have been carefully vetted by qualified specialists or subject matter experts. These experts are often organized into committees or networks that are a part of a project’s governance structure.  The committee structure for an international oil and gas mega project with multiple partners can be complex. See the figure below.

 

 

The terms of reference (purpose, structure, roles and responsibilities) for the Management Committee are specified in a Production Sharing Agreement (PSA). The terms of reference of the Operating Committee are specified in a Joint Operating Agreement.

As expected, the speed at which decision are made in a complex governance structure, such as shown above, can be very slow. Often recommendations are returned after committee and support review with numerous questions. A major decision will have to go through 2-3 reviews and OpCom and ManCom approvals.

The governance structure for facility enhancement projects is smaller and less complex. See the figure below.

 

 

Decision making on medium sized projects is faster. Approvals for purchase a piece of major equipment or contracting of engineering services that require regional BU Manager sign-off can easily take 6-8 weeks. Adequate approval time must be included in the project execution schedule.

 

 

GOVERNANCE: DELEGATION OF AUTHORITY

The degree to which approval authority is delegated varies by company, culture and ownership. The figure below shows typical delegation levels for a business unit.

 

 

Some companies delegate little approval authority to project managers believing that the best decisions will be made 1) after multiple reviews and 2) when their best decision makers (which are at the higher levels in accompany) make the call. This practice often leads to schedule delays due to the multiple reviews at each level and the challenge of getting on the upper-level manager’s schedule.

 

GOVERNANCE: ROLES AND RESPONSIBILITIES

Clear roles and responsibility facilitate good decision making.  These roles and responsibilities are generally defined in two documents. These documents are the RACI diagram and job description.  The RACI diagram spells out who is responsible and accountable along with who should be consulted and/or informed when recommendations for key project decisions are being formulated and vetted. Further detail on responsibilities and accountability can be found in individual job descriptions. A good practice for onboarding is to have the new team member review and agree to the job description before beginning their new role.

 

GOVERNANCE: PROJECT MANAGEMENT SYSTEMS, PLANS AND PROCEDURES

Petroleum companies and contractors prepare and implement numerous policies, processes, structures, procedures, plans and tools to guide project development and decision making. A typical hierarchy of these governance documents is shown below.

 

Document Hierarchy

 

With such an array of guidance and instruction, why do 70% of today’s major industrial projects fail by overrunning cost, exceeding the schedule, and exhibiting poor operability? The story is only a little better for smaller projects whose failure rate is about 30%. Project failure is typically attributed to:

Inadequate definition

Wrong project selected

Poor execution

Extended startup

However, ineffective project governance is also a root cause of project failure. Some examples of ineffective governance are:

Smaller projects are burdened by governance structures that are designed for larger, more complex projects.  The administrative burden of “checking all boxes” is excessive. Decision making is slow.

Project processes focus more on reporting needs rather than effective decision making.

Large projects may suffer from risk aversion due to the high economic and career penalty that can come from poor decisions. Requiring group consensus on major decisions blurs individual accountability. Risk aversion often leads to recycling of approval documents due to questions and requested changes at each level, and decisions being influenced by those who do not have a direct stake in the project.

 

CONCLUSION

Timely, effective decision making is required to maintain project progress and produce good cost and operability outcomes. Understanding a project’s governance structure and the requirements for gaining approvals is essential for good project management. Governance structures and the accompanying resources and processes must be tuned to match the risk, size and complexity of a project. Clear roles, responsibilities and accountability for internal project stakeholders are critical. Otherwise, we have no one to blame but ourselves.

To learn more about project governance, decision making and other key focus areas we recommend enrolling in Project Management for Engineering and Construction. Additionally, you can browse all our project management courses here.

Written by: Ken Lunsford

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