Demonstrating Prudent Project Management

Sep 16

Within the regulated utility industry, prudence reviews represent a commonly applied process by the regulator to ensure the utility’s project management decisions and actions were reasonable and in alignment with standard industry practices. This allows the regulator to have an informed view on whether the costs associated with the project in question were also reasonable and necessary and thus appropriate to be recoverable through rates or tariffs, protecting customers from bearing costs of unreasonable decisions.

This article discusses the definition of prudency commonly applied by utility regulators in North America and what prudency reviews typically cover before discussing best practices for a utility to implement to be prepared for a prudency review.

What is Prudent Project Management?

In general, prudent project management reflects the course of conduct a competently managed utility takes towards project management based on the existing and reasonably known information available at the time of the decision or action. How this is specifically defined varies slightly across jurisdictions, though some core elements remain common, specifically that it represents a managerial reasonableness test applied backward in time, but based on what was known or knowable at the time and not on project outcomes.

As an example, the Georgia Public Service Commission (GPSC) adopted the following standard for prudence in its Order from GPSC Staff’s Review of GPC’s Rocky Mountain Pumped Storage Facility (GPSC Docket 6739-U):

“A decision must not be judged as correct or incorrect in light of perfect hindsight. Rather, a decision must be judged as to whether it was reasonable given the facts and circumstances which were known, or which reasonably should have been known at the time the decision was made. In applying this standard, it must be recognized that in any decision-making process there may exist a range of choices, any or all of which could have been adopted by reasonable management in good faith and under the same set of circumstances. If the Company has made a decision which falls within that ‘zone of reasonableness,’ that decision must be found to have been prudent, irrespective of whether others may have selected another alternative, and irrespective of whether in hindsight another decision may now appear in hindsight to have been a more correct decision.”

To summarize, the common elements of prudency reviews include:

Ex ante reasonableness: whether a reasonable utility manager, facing the same information and constraints, would have made the same decision at the time.
Known or knowable standard: evaluating decisions based on facts known or reasonably available at the time of the decision (i.e. without hindsight).
Outcome-neutrality: reasonable decisions may lead to poor results, but are still considered prudent decisions based on what was known or knowable.
Burden of proof for demonstrating prudency: typically the burden of proof falls to the utility to demonstrate in its rate hearings/prudency reviews.
Backward-looking: ignoring the present conditions and examining the utility’s initial decisions and its responses to changing circumstances and new information.

What do Prudency Reviews Typically Cover?

Naturally the specific aspects of a prudency review reflect the characteristics of the project being reviewed, though commonly reviewed elements typically include the planning, contracting, and construction of the project and may also touch upon the operations and financial management as well. Projects that have encountered well-known issues (e.g. significant cost/schedule growth, start-up challenges, etc.) should expect a spotlight on these issues during the prudency review. As mentioned above, the focus is on whether actions and decisions were reasonable at the time based on what was known or knowable.

Examples of themes often covered in prudency reviews are provided below aligned with typical project lifecycle phases. A full prudency review will often cover all of these themes with an examination of:

Was each major decision reasonable based on what was known or knowable at the time of the decision?
Did the utility maintain adequate documentation?
Were cost overruns avoidable or the result of imprudence?
Should any costs be disallowed?

Key documentation to support a prudency review includes decision memos, alternatives assessments, project management plans, progress reports, bid evaluations, contracts, change orders, risk registers, forecast assumptions. In some cases the record may be expanded further to include correspondence amongst the key parties relating to the project.

Prudency Review Themes

Expanding on what is considered during a prudency review, below we’ve listed areas of review as aligned with typical project lifecycle sequencing showing what is commonly considered during a prudency review under each stage, including what the regulatory steps involved in each stage typically include.

Need Identification & Initial Go/No-Go Decision

The foundation of the prudency record, establishes whether the utility acted reasonably at the time based on:

Load forecasts, reliability standards, policy mandates, and system constraints.
Alternatives assessed (least-cost/least risk options).
Timing decisions (too early, too late, appropriately sequenced).
Early risk identification and mitigation planning.

Regulatory steps: IRPs, CPCN applications, pre-filing consultations, early stakeholder challenges.

Planning & Pre-Construction Governance

Once a utility establishes a project path, prudency expectations shift to assess if the utility had a reasonable plan and governance structure through review of:

Project management plans.
Engineering studies, route/site selection, environmental reviews.
Procurement strategies.
Contracting and incentive frameworks.
Initial cost/schedule baselines.

Regulatory steps: CPCN approval, environmental permits, pre-construction compliance filings.

Construction & Execution Oversight

Focused on actual project execution, where many risks are realized, which is also tied to the phase where most prudency disallowances originate. Prudency reviews examine:

Contractor oversight, change order management, schedule control.
Response to emerging risks.
Cost containment and avoidance of scope creep.
Quality assurance and adherence to industry standard practices.

Regulatory steps: construction progress reports, cost-tracking filings, management audits.

Adaptive Management & Mid-Course Corrections

Examining how the utility adjusted to changing conditions during execution – essentially did the utility reasonably adapt or did it ignore warning signs? Areas of focus may include:

Change in contractors/renegotiating contracts.
Re-evaluating need based on new demand forecasts.
Updates to risk assessments and mitigation plans.
Documenting rationale for decisions contemporaneously.

Regulatory steps: mid-project reviews, rate case filings, prudency ‘snapshots’.

Commissioning, Operations, & Cost Allocation

Following completion of the construction phase, the prudency review continues with reviews of:

Testing, commissioning, and early operational performance.
Allocation of costs between capital and O&M.
Avoidance of excess capacity or overbuilt facilities.
Operational efficiency.
Contract closeout/dispute resolution.

Regulatory steps: rate cases, operational audits.

Common Areas of Imprudence

Based on the common themes covered in a prudency review discussed above, there are also common areas where utilities may have exposure to imprudence if not properly prepared including:

Reconstructing decisions after the fact.
Missing or inconsistent documentation.
Poor change‑order control.
Failure to revisit assumptions when conditions change.
Overbuilt or unnecessary facilities.
Weak procurement justification.
Lack of cost‑containment measures.
Inability to explain why alternatives were rejected.

Best Practices

Having covered what is typically considered during a prudency review and areas where imprudence can be found, we now shift our focus to how best to prepare to demonstrate prudent project management. At its core, preparing for a prudency review is centered on establishing a contemporaneous record that demonstrates the utility acted reasonably at each decision point based on what was known or knowable at the time, including:

Risks were identified and managed;
Alternatives were assessed;
Deviations from plans were justified;
Costs were controlled and traceable; and,
The utility responded appropriately to new information.

The strongest preparation blends documentation discipline, governance structure, and narrative coherence. Practices that provide this structured support for being prepared for a prudency review include:

1. Maintaining Contemporaneous Documentation – the core evidence supporting a prudence review, typically contains:

Decision memos with time/date stamps and appropriate sign-offs.
Alternatives analyses with rationale for selected option.
Risk registers that are regularly updated.
Procurement records showing competitive processes or justifications for sole-source awards.
Change order logs with cause/rationale and cost/schedule impacts noted.
Meeting minutes for key decisions.
Progress reports demonstrating actions, issues, and decisions and related project information as was occurring in near real-time on the project.

2. Demonstrating a Structured Decision-Making Process – shows the regulator that the decisions were not ad hoc and relied on a reasonable basis, which can be demonstrated though:

Stage-gate reviews with clear criteria.
Independent assurance or challenges.
Cross-functional review teams.
Use of industry standards and benchmarking.
Show alternatives were genuinely evaluated.

3. Track and Justify Cost Evolution – cost overruns are not automatically imprudent, but unexplained overruns have higher exposure to disallowance, capture evidence on active cost management through:

Maintaining a baseline budget and schedule.
Documenting variance drivers (scope, market conditions, unforeseen conditions, etc.).
Showing mitigation steps taken.
Separating avoidable and unavoidable costs.
Keeping a clear audit trail for allocations between capital and O&M costs.

4. Demonstrating Active Risk Management – utilities are expected to anticipate and respond to risks, this includes:

Maintaining a living risk register.
Documenting mitigation actions and triggers.
Showing escalation pathways and decision logs.
Capturing how new information changed plans.

5. Ensure Procurement and Contracting Withstand Scrutiny – with the contracting strategies forming a critical aspect of the overall project execution, demonstrating sound procurement strategies is similarly important to a prudency review and can be accomplished through:

Utilizing competitive bidding unless otherwise justified.
Clearly defined evaluation criteria.
Contracting structures that appropriately align incentives.
Documentation of negotiations and change order controls.
Vendor performance monitoring and corrective actions as needed.

6. Prepare a Coherent Prudency Narrative Early – rather than retroactively piecing a narrative together after the fact, establish it in close to real time as the project unfolds by:

Recording a chronology of key decisions with what was known at each point and why the decision was reasonable.
Demonstrating how risks were managed.
Demonstrating how costs were controlled.
Appropriately responding to new information.

By implementing the above practices, a utility should be prepared for a prudency review. A critical point is that failure to respond to emerging risks and new information is a classic “hidden imprudence” finding, where it wasn’t the specific decision made, but the lack of active management that drives the imprudence finding.

Advanced Best Practices

For megaprojects, and in particular first-of-a-kind type megaprojects with higher exposure to risks and uncertainties, it is often beneficial to implement additional best practices to withstand the scrutiny of a prudency review. Such advanced best practices include:

1. Utilization of Independent Assurance and Third-Party Validation – creates further credibility and reduces the appearance of self-serving analysis as demonstrated through:‑ as demonstrated through:

External constructability reviews.
Independent cost/schedule validation.
Peer utility benchmarking.
External risk audits.
External readiness reviews.
Independent monitoring.

2. Establish a Regulatory Engagement Strategy – proactive engagement reduces surprises and includes:

Pre-filing consultations.
Interim updates during construction.
Transparent disclosure of emerging risks/changing conditions.
Early notice of significant cost/schedule variances.

3. Mock Prudency Reviews (“Reverse Audit”) – essentially serves as a trial run at a prudency review by:

Reconstructing the decision chain.
Identifying documentation gaps.
Stress-testing explanations.
Preparing witnesses for cross-examination.
Validating that the narrative is supported by the record.

Closing Thoughts

Prudency reviews assess whether utility project decisions were reasonable based on what was known at the time—not hindsight. And while cost overruns are a common occurrence on megaprojects, a cost overrun alone does not automatically imply imprudence. With utilities typically having the burden of proof to demonstrate prudency, the strongest defense is a clear, contemporaneous record of the full project lifecycle showing disciplined documentation, sound governance, active risk management, justified procurement, cost control, and perhaps most importantly – timely responses to new information.

Jeremy Clark