To design a successful operational model for managing capital projects, a number of different considerations must be given close attention. For starters, project classification and staffing, decision making, and governance deserve keen focus. Based on our experience, Strategy& has identified six key elements that can play a big role in whether a capital project is successful. They are (1) classifying the projects correctly so the appropriate operating model can be used, (2) staffing and resource allocation, (3) designing an effective management structure for oversight, (4) alignment with overall short- and long-term business strategies and a system of effective governance, (5) well-planned decision-making authority, and (6) carefully drawn processes and policies.
But although these six elements must be taken into account, the most significant factor in reliably increasing the odds of a capital project that meets deadlines and financial performance metrics is the management and execution of sourcing, which accounts for as much as 90 percent of the budget for large-scale projects . Typically, third parties handle everything from engineering, materials, and equipment to construction oversight. Consequently, the way a company supervises and controls suppliers and other outsourced relationships will often determine the outcome of the capital project.
Considering the broad influence of procurement on a capital project, it’s not surprising that there are supplier and vendor issues that must be addressed at all stages of the project life cycle.
Portfolio planning and design
Cost overruns and scheduling problems due to unexpected increases in resource prices and requirements are not unusual. Often, these issues occur because procurement is not given a broad enough role in the portfolio planning process and supplier agreements are negotiated one-on-one between contractors and business units. Up-selling and design changes frequently occur on the fly, ignoring prior budget
decisions and supply chain lead-time deadlines. In other words, forecasting lacks the insight and controls that procurement can bring to it and is not fully integrated into project management. Moreover, each project is treated like a unique effort with no commonalities that can be leveraged for scale.
Arguably, the poster child for the many poorly planned capital projects over the past few decades is the Sydney Opera House, now considered one of the world’s most stunning music venues but during its development a disappointment and an embarrassment to Australians. Construction began in 1959 after getting the go-ahead from the nation’s Parliament in legislation rushed through before the project’s opponents got into office. In order to win approval, the project’s budget was set at an artificially low level. And to ensure that the decision could not be reversed, construction began even before blueprints were available. In the ensuing years, the primary architect quit the project amid requests for frequent design changes, while prices for materials and labor skyrocketed. There was very little oversight by competent project managers or supervision of up-front planning and ongoing supplier issues by procurement specialists. Indeed, because project backers completely ignored the need to assess future costs realistically and dismissed the impact of project modifications,
Many companies find themselves in the uncomfortable position of having only a handful of suppliers that can provide the services they are looking for in a region. And with minimal competition — and the corresponding confidence that they effectively have the upper hand
and will not likely lose the order — suppliers are loath to be particularly transparent about pricing or their costs. Companies frequently complain that prices can vary from one project to another by as much as 25 percent. Limited supplier development programs and the lack of ongoing supplier performance tracking — a set of metrics incorporated into the bidding process — are often to blame for the dysfunctional relationships that companies have with their third-party providers.
Companies typically delegate to their suppliers oversight of individual aspects of a project. Stretched internal engineering departments generally play only a limited oversight role, often approving additional costs or time delays without the capacity or capabilities to probe deeply to see if they are warranted. By not formalizing supplier expectations up front and not crafting incentives tied directly to performance throughout the contract, companies minimize their chances of celebrating a successful capital project. Much of this could be fixed if corporate silos were eliminated and procurement worked with engineering on project oversight and management, an arrangement that would also allow procurement departments to implement long- term, multiproject evaluation processes, allowing the company to learn from each effort and improve.
Warranties tend to be ignored by both companies and suppliers, as it is generally agreed that suppliers will fix problems that arise, sometimes billing the client company and other times swallowing the costs themselves. In fact, warranties are typically invoked only as a last resort, often in combination with litigation. In addition, although companies may have a contract with an individual supplier, the vendor might subcontract out portions of the job to any number of other operators without informing the client. These and other operational issues drive increased inefficiency and cost overruns, as virtually any errors or mistakes in a project are treated as one-time issues rather than as part of an overall performance agreement with incentives linked to schedules, costs, and quality and with specific penalties and responsibilities if these standards are not met. This situation usually betrays poor governance procedures (in part, limited procurement involvement) for capital projects, a general neglect of efficiency and continuous improvement goals, and the lack of a failure modes and effects analysis, a framework that could identify potential problem areas in a project based on past experiences with similar efforts and establish procedures, such as applying warranties, to address these faults as they arise.
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