Heathrow Terminal 5: Cost Management for a Mega Construction Project

Cost overruns and delays are so common in the construction industry that they are almost expected. The success of LHR Terminal 5 (T5) thus came as a pleasant surprise. The main objective of this case study is to explore the factors that enabled this remarkable success. The T5 expansion project was needed to increase passenger capacity and was of strategic importance for Heathrow Airport to remain competitive with other European hub airports. Its colossal budgeted cost of £4.3 billion reflected its scope and complexity but also foreshadowed a myriad of challenges and risks of delays and cascading additional costs. Nevertheless, the new terminal was delivered not only on time in March 2008 but also, against all odds, within budget. Well aware of the negative track record of the construction industry and the financial risks of the project, the sponsor, British airport operator BAA, adopted a novel approach. BAA developed the T5 Agreement, a unique contract that provided suppliers with strong incentives to outperform the industry’s standards, both individually and collectively. The contract also gave BAA the authority to operate as the sole project leader throughout the program. BAA used this legitimacy to institute efficient processes and well-aligned incentives early on. The collaborative mindset setup by the T5 Agreement influenced how traditional cost management methods, such as earned value management (EVM), were used to incentivize the right behavior. The company also used modern techniques to reduce the potential for wasted time and cost by streamlining processes. The combination of these factors contributed to the surprising but welcomed success of the T5 project.