From Dr. Thomas Glöckler
Project Manager and CAPEX Expert
T.A. Cook (tacook.com)
According to this article by T.A. Cook’s Dr. Thomas Glöckler, when investment projects are “done right,” they offer the greatest potential for companies seeking to decisively improve their performance. He has compiled several important “rules” for keeping an organization’s CAPEX projects moving in the right direction. Read on.
Investment projects are critical in asset-intensive industries in order to be successful in the long-term. With global capital expenditures standing at approximately more than $10 trillion per year and expected to rise over the coming years, it’s therefore vital to get these projects right from the start.
Yet only one in every three projects actually meets the objectives set when the project was authorized. Added to that, 40% of projects fail, mainly because they run over budget or duration, or due to missed production targets over more than two years. However, carried out correctly, investment projects are a huge opportunity for companies to markedly improve their performance.
Through our work across multiple industries, we have identified six “golden rules’”to which companies should adhere in order to successfully plan, execute, and complete CAPEX projects. They are:
1. Portfolio Optimization – Choosing the Right Projects at the Right Time
Regardless of size of the company, funds are usually limited, so deciding where to invest money and resources should always start by looking carefully at what is in the best interests of the business. Every project should first be rigorously assessed, conducting a thorough analysis of all the risks and design assumptions with the use of additional experts. Each project investment must also align with the company’s short-and-medium term goals. By applying these lean and agile project management practices, project schedules can be reduced significantly by as much as 30%. This is in line with the shift towards more smaller projects.
2. Project Governance – A Robust Framework Is The Foundation for Success
Establishing a project-management office, procurement, supply chain, logistics, risk tracking, and stakeholder/ESG (environmental, social, and governance) outcomes from the outset enables the required focus, resourcing and standardised reporting on progress. This provides the necessary insights for quick and effective decision-making. The use of project-management expertise can also deliver significant cost savings. This means setting out a clear project definition, including cost and schedule estimates, and scope from the start. The target is to minimize capital expenditure, thus significantly reducing the risk. Project managers should have a clear understanding of the engineering, commercial, and managerial disciplines, as well as a thorough grasp of the codes and regulations that have to be adhered to. They must also be able to acquire and manage the resources required in a timely manner. Additionally, they should be able to react quickly to any changes that happen during the project’s lifecycle.
3. Planning and Execution – Details Matter
To drive more value from infrastructure CAPEX projects, detailed planning and reliable performance are crucial. Project management must be optimized to maximize the return on investment. Firms that have improved their CAPEX management have achieved returns of up to 20%. To improve CAPEX management, managerial activities also need to be aligned with best international practices. This means having in place a list of key outputs and an extensive schedule, packages and vendor specifications, a site readiness plan including an optimized construction schedule, a schedule of purchase order issue and delivery dates, and an all-inclusive and sequenced site mobilization. In addition, a commissioning plan, prefabrication of parts and elements, a hand-over plan and a staged ramp-up schedule based on OEM recommendations are required.
4. Contracting Optimization and Procurement Management
The entire budget-to-pay (B2P) process must also be reviewed. The gains from this approach are primarily through the avoidance of costs (e.g., by reducing budget overruns). Having an established procurement practice, supported by a strong logistics chain will reduce risks and add significant value to the project by protecting and safeguarding the overall schedule. This includes alignment of CAPEX management with the company and investment allocation. Projects also need to have clearly defined stages. Along with the appointment of an end-to-end champion responsible for the entire project lifecycle, risk-management tools need to be applied..
5. Active Supervision and Rigorous Risk Management
Key to driving more value from infrastructure CAPEX projects is establishing a strong foundation for the operating phase by ensuring the team achieves its productivity goals during the construction stage. Taking proactive steps in detailed planning, alignment and execution will streamline the processes required during this phase along with rigorous risk management.
6. Ongoing Operational Excellence for Stability and High Performance
Operational excellence is achieved through the systematic management of all processes. Companies that adhere to this standard improve manufacturing processes, asset reliability, and quality of products and services. This results in improved asset utilization and throughput, increased reliability of equipment, and safe and reliable operations.
Managing CAPEX projects is a highly complex process. (This has become even more challenging as a result of the Covid-19 pandemic.) Managing such projects successfully involves optimizing your portfolio; having the right governance in place; planning and executing effectively; efficient contracting and procurement management; rigorous risk management; and ongoing operational excellence. By applying these rules, you can both vastly improve overall project performance and reduce your risks and costs.♦ ♦ ♦