If you’re at the helm, your ability to understand and apply these two capital project principles could be the difference between success and failure.
Before we dive into capital project principles, let’s establish some context for the discussion. Globally, there are currently 650 downstream capital construction projects underway. Combined, the investment value of these projects is estimated at a remarkable $100 Billion. Western Asia is leading the world in this area, with a spending outlook of over $78 Billion. North America ranks fourth, behind South Asia and Africa, with an estimated $27 Billion in refining projects in progress.
At a glance, these numbers paint a rosy picture of an industry that is growing and thriving the world over. The reality, however, is not so bright: Many of these projects may not be authorized to proceed. There is widespread disequilibrium in petrochemical markets, partly because of a glut, and partly for social, geopolitical and environmental reasons.
For executives working on these projects, this means the critical early years are colored by uncertainty, hesitation and thrift. Unsure whether early investments will pay off, companies and the executives who work for them become unwilling to spend on the comprehensive front-end definition of these projects. This failure to invest properly undermines project predictability from the outset, and leads directly to the catastrophic cost overruns that plague the capital projects industry.
In this challenging environment, it’s important for executives to distinguish between capital project principles and practices. True principles will help you maintain a predictable mindset and apply it rigorously, without losing focus.
Capital Project Principle No. 1
Stay true to your capital strategy
Executives must always be able to connect spending to goals. On capital project teams, most executives operate with the guidance of a high-level capital strategy, which outlines how the company’s capital expenditures and financing decisions will contribute to growth and profitability. A good capital strategy will also provide direction on managing risk and its implications for long-term financial sustainability.
Stay true to your capital strategy. To do this, focus on linking resource requests to the goals in your capital strategy. Ultimately, a project is a resource request. Does this one fit with your capital strategy?
Sound and thorough planning at this level is an executive responsibility. It’s not the job of the project team to know the limits of the market, the limits of the site and the limits of the company itself — project teams simply don’t have the context nor the time and resources to understand the risks and other factors that will impact predictability down the line. It is the executive’s job to know and stress the importance of linking every resource request with the capital strategy, and to understand the gap between the capacity of the current and future assets and their ability to deliver the desired results.
In short, it’s not good enough anymore to kick off a project on a +/- 50% estimate, and then to determine whether that opportunity is worth going for or not. The way to get there is to have a conscious and continuing exercise in determining the gaps in the business, execution and people capacity of the current asset, and the Predictability Index of the various project alternatives for getting to a certain business goal.
Capital Project Principle No. 2
Value predictability over effectiveness
Stop measuring effectiveness to the exclusion of all else, and start focusing on predictability as a higher priority. Decades of research and experience have taught us that a relentless focus on capital effectiveness is taking us in a vicious circle and is not delivering results at the macro level — indeed, it has slowed down predictability goals for projects. Adopt a Predictability Thinking™ mindset instead.
What does a Predictability Thinking™ mindset look like? Consider the aforementioned industry bias against spending during early definition. An executive who has adopted a predictability mindset would see that the only way to get a true picture of project viability is to be extraordinarily thorough in the early definition phase of the project, and that means closing all predictability gaps early on. If he can make a prima facie case that the project aligns with the capital strategy, then the expense of comprehensive early definition can be justified.
Further, if the project is approved, he can be assured that the project management practices and frameworks are in place to optimize the chances of success. Executives who think in terms of predictability know they must understand modern capital project delivery models and practices and tools so they can establish projects and staff teams that will work successfully.
Here at Concord we’re on a mission to establish a set of core principles that executives throughout the capital projects industry can reliably apply to their projects. This article is the third in an occasional series that looks at principle-driven capital projects leadership and execution, with a focus on Advanced Work Packaging. If you’d like to read the previous articles in the series, click on the links below. If you’d like to talk to us about getting support on your journey to predictability, please click here to contact us.
Toward Meaningful Management Innovation (Sept. 10, 2018)
Tactics vs. Principles in Capital Project Management (Jan. 31, 2019)