July 28, 2020

CAPEX Project Risk Management: Are you dropping the ball?

IS³ - Industry Software, Solutions and Support
IS³ - Industry Software, Solutions and Support
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Like in professional sports, CAPEX project contracts are complex and risk-ridden. Mitigation is the name of the game AVEVA’s unified project execution approach can help.

Beyond their massive salaries, athletes also receive huge performance incentives like  bonuses and player of the match. An astounding win bonus of approximately R1.5 million was given to each of the Springbok players after they won the 2019 World Cup.

Performance-based contract incentives are added to athlete’s contracts to motivate players to improve performance in areas they have been struggling or to drive record years.

The more complex the contract and the more variability that occurs throughout its term, the more difficult it is to maintain the intention behind the initial agreement.

What do CAPEX projects and Rugby have in common?

Professional sports seasons are incredibly unpredictable, and due to constant scope changes and fluctuations to the plan, industrial projects face similar challenges.

But projects and sports are alike, the costs are rising. The bonus win for the Springbok players at the 1999 Rugby World Cup was R190 000 but 4 years later, the win bonus was 10 times more.source (https://www.iol.co.za/sport/boks-get-a-big-incentive-to-win-the-world-cup-12368) .

Rising costs in the construction industry are due to the complexity of the relationships and contracting structures. According to the Construction Industry Institute (CII), the same heavy industrial project valued at $100 M (approximately R1,6 Billion) in 1998 costs $222 M (approximately R3.6 Billion) to produce today. In 2038, this investment is expected to increase to $568 M (approximately R9,4 Billion) if the industry maintains the same processes.

Source: Construction Industry Institute (CII)

With more complexity comes higher costs, and therefore greater stakes. And in business, as in sports, reducing risk for better outcomes is the name of the game.

Deferring risk is not enough

Historical data from McKinsey shows that 98% of capital projects are delivered over budget and 8 of every 10 are delivered late.

The first step to solving a problem is admitting the problem exists in the first place. In other words, to effectively manage CAPEX project risk, you must accurately assess it. Many projects today underestimate the actual cost of execution to gain a financial investment decision (FID), which is critical to moving forward with the work. This creates an incredible amount of risk right off the start, and in the end, one (or more) party will come up short when the project is delivered off-plan.

If EPCs and Owner Operations want to make progress against the grim stats above, they need to recognize from the start what the true cost of execution really is and align their contractual agreements accordingly.

Unifying execution for success

Due to the size and complexity of the contracts, and the high chance of change throughout their terms - parallels can be drawn between the strategy behind athletic contracts and the agreements industrial Owner Operators and their contractors form for CAPEX project delivery.

To align project teams towards the same goal of on-time and on-schedule delivery, an Owner Operator might consider a unified approach to setting up the contractual ecosystem and put in place controls and tools to manage any unforeseen change.

Unified Project Execution (UPE) is a capital project execution approach that integrates people, systems, business structures and practices into a process that collaboratively harnesses the talents and insights of all participants to optimize project results, increase value to the owner, reduce waste, and maximize efficiency through all phases of procurement, construction and handover.

AVEVA’s unified approach to CAPEX project risk management can be applied to a variety of contractual arrangements, allowing teams to include members well beyond the basic triad of owner, architect, and contractor. In all cases, unified projects are uniquely distinguished by highly effective collaboration among the owner, the prime designer, and the prime constructor, commencing at early design and continuing through to project handover.

Aligning incentives drives better business processes & automating processes allows better tracking against these incentives.

The contract strategy and execution mind-set is more similar in major projects and high performance sports than it seems at first glance. By aligning incentives with performance outcomes, backed by automated systems to track variables and enforce business processes according to the contractual agreement, a project is truly set-up for high performance results and simply put, everybody wins.

Learn how AVEVA’s Unified Project Execution approach could shave 15% off the cost of your next project.

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Written By - Vanessa Erickson

Vanessa Erickson is the Global Marketing Lead for the Procure, Construct, & Handover portfolio at AVEVA. She is primarily responsible for thought leadership and customer engagement to enable reduced risk and drive greater efficiency and profitability for AVEVA’s Owner Operator and EPC customers involved in CAPEX project execution. Vanessa previously worked for Hexagon PP&M (previously Intergraph), and Acklands-Grainger where she held regional and global sales and marketing roles delivering transformational technology, construction & fabrication solutions to asset-intensive industries including Oil & Gas, Power, Petrochemical and Marine. Vanessa holds a B. Comm. in Marketing from the University of Saskatchewan.