CAPEX Project Overruns: Why You Simply Can’t Afford Them
Research suggests that on time and on budget completion of complex projects is the exception rather than the norm. In 2014, EY analysed 365 complex projects and found that 64% face cost project overruns and 73% report delays. Completion costs were, on average, 59% higher than initial cost estimates – an increase in total of US$500bn.
Clearly, nobody sets out to fail but it appears that they are far from isolated examples when they do. So, what’s going wrong?
Bring back best practice
An analysis of project failure factors by Credit Suisse (see the diagram) might alleviate some of the pressure for those who run complex projects, but not a lot.
Project overruns chart research from EY
Only 14% of the causes can be attributed to circumstances beyond the control of project principals; government intervention and environmental issues. For everything else – how the project contracts are set up, monitored, controlled, communicated, and run – there’s a better way.
The bigger they are, the harder they fall
When complex projects fail, they often fail spectacularly; costing a fortune, affecting the brand value, damaging the share price and incurring penalties. Tighter controls across every aspect of complex projects are essential. Rigorous risk assessment is critical. Communication as the project develops is pivotal.
Of course, it’s easy to make the rules, but it should be equally easy to control changes as they come onto the work schedule, as long as all parties to the contract are open in their communications.
How do 2.7 million man hours go unnoticed?
Here’s an example…Exxon’s Arkutun-Dagi project, renowned for delivering one of the largest offshore drilling platforms in the world. Owner operator Exxon sued contractor WorleyParsons, claiming that the contractor made so many mistakes designing the platform that the work took 2.7m more man-hours more than originally estimated, delaying the project by a year.
The contractor denied this, saying Exxon increased the scope of work and didn’t make them aware of problems. In May 2015, WorleyParsons reached a settlement of the dispute setting the company back $78m.
How to save $78m
How can such a tragic, time-wasting, and expensive disaster have been averted?A major oil company identified over $300m of cost saving on a 2012 development project, directly attributed to its use of ProCon.
It seems that the project objectives were not clearly defined, and that costs and deadlines were misunderstood. Putting the right sort of framework in place can avoid such issues.
This would be a framework defined and driven by software – designed to keep complex project contracts on track and in line with three core principles:
Transparency – the single version of the truth
The building of large drilling platforms is breathtakingly challenging. Disciplined, daily (or even more frequent) contract communication is essential. Such an approach is not just about securely managing changes and events; it’s also about creating an audit trail. This trail, when the time comes to find out who did what, when, why and how, is the independent source of truth; the validation of events.
Tight change management
Equally important, risks always need to be flagged early to those who need to know. When they are, it’s essential that they are accompanied by analyses of the potential financial and schedule impacts. Change requests are common in complex projects. They are the main cause of overruns. They must be tightly managed.
Consistent best practice
Long gone are the days of managing these types of risk with spreadsheets, tedious manual input across numerous locations. Tracking vast quantities of data, contract communications and potential versus actual spend needs a fit-for-purpose contract management system that ensures consistent, timely, reliable and robust best practice across all parties; enabling owner operators and EPCs to:
Manage the contract risk
Access real-time data showing potential and actual costs. Trust the audit trail when it comes to speeding up the discovery process – reducing costly fees from law firms, consultants and forensic accountants.
The economic landscape has never been in a greater state of flux than it is today. Enormous social and political factors are affecting commodity price changes and, as a result, profit margins. Uncertainty increases the pressure to deliver capital projects on time and on budget.
Owner operators and EPCs need to explore and take advantage of every means available to honor their commitments to stakeholders. They need to do all they can to avoid becoming another astounding statistic like the Arkutun-Dagi overrun. Put simply, they need to plan for success.
At the same time they need to be realistic about the chances of falling short – hence building in not just contingencies for the impact of change, but also completely reliable audit trails should they find themselves having to look back over the project in anger. It’s time to start saving money. And it’s never too late to save the day.
Explore the most common causes of overruns and how to tackle them. Read the white paper ‘Capex project overruns: Tackling the lasting negative effects of risk’. Download the white paper here
This article was orginally published