![]() This step involves reviewing sources and uses of cash and ensuring allocated capital is linked to strategy. To do so, organizations must build a transparent and rigorously tested baseline and capital budget, which should provide a clear understanding of the overall capital expenditure budget for the coming years as well as accurate cost and time forecasts for an organization’s portfolio of capital projects.Įnsure capital allocation is linked to overall company strategy. It’s essential to identify strengths, areas of improvement, and the value at stake. Organizations can address this challenge by following a systematic three-step approach:Īssess the current state of capital projects and portfolio. Indeed, a failure to adequately recognize, price, and manage the inherent risks of project delivery is a recurring issue in the industry. Too often, organizations commit to projects without a proper understanding of business needs, incurring significant expense to deliver an outcome misaligned with the overall strategy. The greatest opportunity to influence a project’s outcome comes at its start. Capital strategy and portfolio optimization ![]() In our experience, companies that deploy these best practices are able to save 15 to 30 percent of a project’s cost. While the savings potential applies to each area on a stand-alone basis, their impact has some overlap. Best-in-class capital development and delivery require companies to outperform in three main areas, supported by several foundational enablers (Exhibit 3).Ĭompanies can transform the life cycle of a capital expenditure project by focusing on three areas: capital strategy and portfolio optimization, project development and value improvement, and project delivery and construction. In our experience, the organizational drivers that impede capital expenditure management affect all stages of a project life cycle, from portfolio management to project execution and commissioning. As the cost of capital goes up, discipline in managing large projects will become increasingly important. In addition, current inflation could put an end to the historically low interest rates that companies are enjoying for financing their projects. As a result, only a few organizations have been able to maintain a through-cycle perspective. ![]() The reliance on just a few experienced people when travel restrictions necessitated a remote-operating model further increased the complexity. At the same time, some organizations have had to make drastic cutbacks in capital projects because of difficult economic conditions. Governments are increasingly viewing infrastructure spending as a tool for economic stimulus, which amplifies the cyclical nature of capital expenditure deployments. The COVID-19 pandemic has accelerated and magnified these challenges. Notably, these occur in both the public and private sectors. In fact, cost and schedule overruns compared with original estimates frequently exceed 50 percent. Executives find it difficult to understand and predict the performance of individual projects and the capital project portfolio as a whole.Īcross industries, we see companies struggle to deliver projects on time and on schedule (Exhibit 2). Second, capital performance is typically a black box. When it comes to capital projects, executives rely on a select few people with experience in capital delivery. First, capital expenditure is often not a core business instead, organizations focus on operating performance, where they have extensive institutional knowledge. Cracking the code on capital expenditure managementĭespite the importance of capital expenditure management in executing business strategy, preserving cash, and maximizing ROIC, most companies struggle in this area for two primary reasons. This dynamic reinforces the age-old challenge for executives as they carefully allocate marginal dollars toward value creation.Ĭompanies can improve their odds of success by focusing on areas of the project life cycle- capital strategy and portfolio optimization, project development and value improvement, and project delivery and construction-while investing in foundational enablers. In addition, ill-considered cuts to key projects in a portfolio may actually jeopardize future operating performance and outcomes. Yet managing capital projects is complex, and many organizations struggle to extract cost savings. In our experience, organizations that focus on actions across the whole project life cycle, the capital project portfolio, and the necessary foundational enablers can reduce project costs and timelines by up to 30 percent to increase ROIC by 2 to 4 percent. This strategy is even more vital in competitive markets, where ROIC is perilously close to cost of capital.
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