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CAPEX BEST PRACTICES

6 'golden rules' to keep large industrial projects on track

 

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 authorised. 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’ companies should adhere to in order to successfully plan, execute and complete CAPEX projects:

 

  By Thomas Glöckner

1. Portfolio Optimisation – 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 minimise 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 optimised in order to maximise the return on investment. Those 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 optimised construction schedule, a schedule of purchase order issue and delivery dates, and an all-inclusive and sequenced site mobilisation. 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 Optimisation and Procurement Management

The entire budget-to-pay (B2P) process must also be reviewed. The gains from this approach are primarily through avoiding 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. As well as an appointment of an end-to-end champion, responsible for the entire project lifecycle, risk-management tools need to be applied too.


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 utilisation and throughput, increased reliability of equipment, and safe and reliable operations.

 

Conclusion

Managing CAPEX projects is a highly complex process. This has become even more challenging as a result of the Covid-19 pandemic. But by adopting the six golden rules set out above you can keep your project firmly on track, and deliver the best possible results and return on investment. That involves optimising 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.

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About

Thomas Glöckler

Thomas Glöckler is project manager T.A. Cook with more than 20 years of experience in Project and Program Management, Interim Management, Asset Reliability & Lean Management. As expert in CAPEX and Operational Excellence he manages global transformation programs mainly for the Chemical, Petrochemical and Oil& Gas Industries. He holds an PH.D. and M.B.A. degree in business and finance. Thomas develops implementation approaches for Asset Performance Excellence projects and ensures the delivery of sustainable benefits for global, asset intensive companies.

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