Four ways to better manage small capital projects
Most manufacturing companies focus considerable planning and management attention on the largest projects in their capital portfolios. This makes logical sense since the dollars at stake and the associated risks are large and highly visible. Getting these projects funded and executed on time and within budget is often subject to both corporate and public scrutiny.
Projects under $10 million typically garner less attention, since the numbers are smaller and the stakes are lower. However, there is mounting evidence that the cumulative cost of small to mid-sized capital projects can be significant. A recent report from McKinsey found that in the chemical industry, small capital projects (those defined as less than $50 million and often less than $10 million) actually make up 80% of all capital projects by number and 50% of spending value. When cost overruns or delays occur on multiple small projects, companies see potentially serious negative impacts on their bottom line, most significantly through unplanned production interruptions and/or delays in getting new product to market.
The numbers indicate a need for manufacturing plants to purposefully invest in overall capital portfolio management, with added scrutiny on the management of smaller capital projects. But doing so is not as simple as copying the processes and procedures that make larger capital projects successful. That’s neither practical nor cost effective. Instead, companies need a fit-for-purpose framework for managing smaller capital projects that considers how they are different and what makes them run smoothly. Below are four concepts for consideration.
1. Collaboration first
Quality front-end planning is the key difference between a successfully executed project and a failed one, but quality planning does not necessarily mean expensive or time-consuming planning. Front-end planning comes down to collaboration. Plant managers tasked with managing smaller capital projects must coordinate with business managers to clearly define project goals and business drivers in order to define scopes and to identify sourcing needs. Similarly, they must work closely with contractors and other outside partners to make sure scopes and timelines are realistic. This upfront investment has been proven to save time in the long run. Potential trouble spots can be identified and work-arounds can be developed and implemented when there is frequent communications in the planning process. With small project execution, an investment in front-end planning always pays off.
2. Be real about risks
Plant managers and engineering professionals tasked with managing small capital projects tend to assume the best-case scenario during planning. They believe that with the right team in place, they can execute a project to perfection. In reality, outcomes are rarely that simple. That’s why it’s critical for plant managers across the owner’s enterprise to agree to a common set of principles and guidelines when determining project timelines, goals and risks. This takes emotion out of the decision-making process and leads to aggressive but realistic timelines that are less likely to lead to complications. Effective capital allocation, and improved returns on capital are definitive outcomes when competing projects can be fairly and accurately evaluated.
There are a number of readily available tools that plant managers can use to help level the playing field, including the CII Project Definition Rating Index (PDRI). The index helps to estimate risks based on the scope definition for a project. PDRI is a helpful tool, but like any tool, it requires the right inputs and a trained eye to be used effectively.
In some instances, manufacturing companies may benefit from third-party support in evaluating and understanding risks. A contractor that has a wide-range of experience working on similar-sized projects can more appropriately evaluate project risks and interpret PDRI results.
3. Choose the right project partners
Selecting a contractor for large capital projects is relatively easy compared to selecting one for smaller projects. There are simply fewer contractors that can manage mega projects. Furthermore, selecting a well-established, large contractor is usually a safe and cost-effective decision. With small projects, the opposite is true. Not only are there far more small contractors, but a large firm might be ill-equipped to work on a small-scale project.
Large contractors typically bring a well-established process with them to every project. These processes are not always downwardly scalable. This can be a problem for plant managers when applied to small projects. Detailed processes require high levels of client participation and significant investments in time and money. Time can be in short supply when plant managers also have to worry about their day jobs. They need partners who are adaptable to their circumstances.
When selecting contractors for small capital projects, manufacturing companies should focus on a fit-for-purpose approach and identify contractors who are experienced in executing small capital projects. This does not necessarily mean they should focus on small contractors. Projects that are properly selected and managed can deliver real cost savings. This requires sophisticated people, processes and tools. Time should be spent evaluating a contractor’s process and experience.
4. Review and recalibrate regularly
Once a project is successfully completed, it’s easy to just move on to the next one. Capital effective execution requires candid self-assessment about the execution process. Companies must understand where they faced disruptions and why those disruptions occurred. Using an agreed upon and objective set of measurements is needed to determine project success. Looking at past projects before beginning a new one can begin to reveal a proven, repeatable process, thereby increasing cost and schedule certainty. This gives business leaders the ability to potentially delay capital investment decisions in order to accommodate market-based decisions and subsequently maximize their returns.
It stands to reason that if the process was sound, then it will work again on the next project. But over time, when project execution is not reviewed and assessed, issues arise. The process that made the first project so successful can be altered in subtle ways that begin to change project outcomes. Companies must review project outcomes regularly and make changes where necessary.
Choosing the right projects and then executing them effectively can yield cost savings in the 10% to 15% range, according to the McKinsey study, subsequently improving return on capital. This creates an opportunity to reinvest in projects that add real value. Plant managers who take matters into their own hands by implementing these four strategies may find that the rewards go beyond managing a more effective plant to helping their company achieve their ultimate goal.
-Bill Wasilewski is president of process and industrial for Day & Zimmermann and is responsible for oversight of the company’s chemical, advanced manufacturing, petroleum refining and food and beverage customers.