Evolution of Spend in Capital Projects

When we talk about spend which builds a capital project, there are two key resources where spend happens,

1. People : People are service providers or executers or advisors
2. Material : Material is a consumable which goes into the building and operationalization of the factory or a development

How the evolution of these two resources in CAPEX, provides us, as 'Capital Project Consultants', with a better understanding on why? and how? these spends will be perceived by project owners and capex consultants.

To understand both these spends, I am listing various factors associated with how the spend is defined, which areas it impacts, how it is perceived and how it is evolving.

People

• People are an irreplaceable spend but certainly 'an optimizable' spend
• With time, cost of people increases, but it does not mean spend will also increase proportionately
• People can be partly replaced by automation or machined working
• People can be replaced based on need or importance given to how their contribution is valued
• In today's capital project environment, people spend is segregated into essential and value add people spend
• Essential people spend is short term, one-project worth
• Value add people spend is long term, project culture specific.

Material

• Material spend is a derivative of the project concept
• Material spend is non-removable or non-negotiable expense, unless the project concept itself is curtailed or optimized for efficient execution
• Material spend increases with price inflation
• Material price increases or decreases with new value engineered material use
• An inefficient manner of project execution has strong potential to substantially over-shoot the material spend and the project budget
• Overall project material spend aligns with market pricing or increases, unless people involved are able to manage it efficiently
• Material spend can be optimized or reduced if people involved make an effort to do so or want to make an effort to do so.

What are we doing or what are we seeing about these spends?

Negative approach over people spend, with the perception that when a need to optimize capex occurs, we feel we cannot control material spend, but people spend is always easy to control and reduce.

I would rather say, material cost cannot be exploited whereas people can be. We all feel, if material quality is compromised, project output suffers. Cost of correction of material is always perceived to be costly.

However, one less capable person can be supplemented for substituted easily and an impact of that can be mitigated by the others on the project easily.

With inflation and rising costs, we increase material capex, however, how many times? have we heard, we will increase people costs? Its rare and not often heard off.

Material matters more than People, from the perspective of the spender.

Material is in limited supply compared to People, where supply exceeds demand.

What connects both the spends? How focused approach of capex advisors brings the right value out of both spends?

Material spend even though being a non-alterable expense, can be controlled and managed for optimization or negated for over-spent with capable efficient people, rather value spend on good project people.

Good procurement management people get the best or optimal material spend possible without any compromises.

Good project management people execute the project with the optimal material spend minimizing cost over-runs without buffers and inefficiencies.

A right people spend is the hand which always rightly controls the material spend.

In coming times, as we move to AI or more mechanized ways of work, spends will be based on the some presumptions which may be true or may be far fetched, such as,

• With AI and software, we can construct a CAPEX without people? To what extent?
• AI and software can transform routine and repetitive tasks in project execution and minimize or optimize people spend. Which will happen?
• People spend will need to be focused on specific skills which impact decision making & impact time & cost in a capex development.

These thoughts will also give a food for thought to CAPEX advisors for how project owners may think on people and material spends.

With a bias to Capital Project Advisors or Consultants, I believe people spend on Capex Advisors is vital to keep projects in-time & in-cost, with focus on decisions which impact these two aspects.