Five Ways to Get Large Capital Projects Back on Track

By Saurabh Harnathka

Driven by massive supply chain disruptions, an uncertain geopolitical environment, and the pressure to reduce Scope 3 emissions, companies in North America are expected to make ?enormous investments in re-shoring manufacturing capacity over the next five to ten years. But according to our analysis, most of these extremely large capex projects are plagued by schedule and budget overruns. These issues significantly reduce the NPV (or IRR) that was initially envisaged at the project launch and can hamstring the company in the long run. ?

While schedule and budget escalations are often attributed to external factors such as inflation, post-pandemic supply chain delays, and weather events, we’ve seen from our work with clients that many budget overruns and schedule delays are due to five factors that can in fact be managed: ?

1. Understaffed teams: Build needed skills. The amount of skilled labor needed for large capital projects, whether highly skilled workers for semiconductor fab labs, craft labor for electrical and mechanical installation, or project management personnel, is not sufficient. Nor is the workforce diverse. ?Solving the talent problem will require collective thinking on the part of industry, academia, and government. Opening training centers close to mega projects, attracting retired personnel back to specific contractual roles, and building more-inclusive workplace environments are all ideas worth looking into.
2. Insufficient engineering detail: overinvest in pre-FEED and FEED. Since 70% to 80% of a project’s value is created before the Final Investment Decision, launching projects without investing in a sufficient project engineering is not advisable. It’s critical for companies to complete FEED/pre-FEED stage to arrive at a +15/-10% capex accuracy estimate before the final decision point. To enable this level of accuracy, owner team should have engineering receivers who can rigor-test the engineering output. Focusing on the quality of engineering and applying regular value engineering processes can help prevent cost estimates from blowing up and allow teams to make right choices at the final investment decision point.
3. Contracts with poorly defined responsibilities and mis-aligned contractor incentives: choose the right partners and a framework so both sides can win. Significant value can be lost unless a fit-for-purpose contracting strategy is in place. Given that many projects can be competing for the same EPCM talent, it’s imperative to choose a contractor who not only brings the right experience but also deploys the best team on the ground. It’s also critical to lay out a clear division of roles and responsibilities (usually in form of a RACI matrix) to avoid gray areas in scope later. Moreover, procurement organizations must understand that the lowest bidder is not always the best. The contract economics need to provide enough incentive for contractors to deploy their best teams on the project; at the same time, it needs to provide robust penalties for non-performance. Finally, given the tight labor market, contracting strategies need to be agile so that owner team can rescope the project and add new vendors in cases where circumstances change.
4. Poor governance and data transparency: Set up robust governance from Day 1. To create the most value from project execution the company’s leadership should first conduct an unbiased audit of the schedule and budget—key for mitigating the optimism bias inherent in such projects. It’s also important to set up a project controls room, with weekly data-backed updates and decision-making. In addition, teams should plan for a three-week and three-month cadence of lookahead planning to ensure that the project stays on schedule. Finally, digital solutions for tracking daily or weekly progress, material readiness, change-order management process, and contractor productivity should be deployed from the outset. One client instituted a rigorous process whereby every contractor had to present proof of their readiness (in terms of manpower, equipment, work-front availability, and materials) to hit critical path milestones. If any milestones were at risk, the contractor worked with the owner and EPCM teams to find alternatives, such as expediting the delivery of materials or adding a night shift to a critical path area.
5. Operational readiness preparation begun too late: Focus on commissioning and operations readiness early on. While in the early phase of the project, the focus is rightfully on construction activities. To be fully prepared, we recommend planning for construction and operational readiness at least 12 to 24 months in advance depending on the complexity of the project. In addition, a separate team should lead the planning activity because of the different skillsets needed; this approach can also reduce unnecessary overhead on the construction teams.

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Mega projects present a mega reshoring opportunity for manufacturers across corporate America. Done right, reshoring can build tremendous value, create jobs, and strengthen supply chain resilience in the years ahead. ?

Acknowledgements

We wish to thank Karthik Valluru Dima Golovinski Eugene Yaroslavskiy Scott Russo Anmol Pandey Gaurav Chhibbar for their contributions to this article.