BOSTON, October 30, 2012—Executing large-capital-expenditure projects such as mines, power plants, and oil and natural-gas fields has become far more complex in recent years. As a result, the companies that own them—and the engineering, procurement, and construction (EPC) contractors that build them—must respond by improving the way they develop such projects, according to a new report from The Boston Consulting Group (BCG). The report, Eight Key Levers for Effective Large-Capex-Project Management: Introducing the BCG LPM Octagon, which is being released today, outlines eight key levers to improve performance.
A number of factors are driving this issue, starting with demographics. There are more people on the planet, with ever-growing demand for basic commodities like oil, gas, minerals, and energy. To meet this demand, projects are becoming larger and more complex, and they are now often located in less accessible parts of the world. In addition, financing remains tight, and the natural resources that are critical to these projects are becoming difficult to secure. All of these factors are creating larger operational and financial risks for owners and contractors.
“These issues are not going away,” says Rafael Rilo, a BCG senior partner and a coauthor of the report. “The factors pushing up the cost and complexity of large projects represent long-term shifts, and they are likely to become more pronounced in the coming years. As such, project developers will need to address them head-on.”
Philipp Gerbert, another BCG senior partner and report coauthor, reinforces this idea. “Companies have taken some measures to improve their project development, but so far they haven’t adopted an approach that is comprehensive enough.”
Eight Key Levers
To address this growing complexity, BCG has identified eight key levers that companies can pull to strengthen their large-capex project management (LPM) capabilities. Together, these levers make up BCG's LPM Octagon and include the following:
Minimize capital expenditure requirements. Project owners need to leverage best practices, scale, and technology effects to cut costs. One power company identified capital reductions of 35 percent by optimizing scale in a project.
Adopt design-to-value techniques for EPC contractors. EPC players need to revamp the design process to better meet client needs while minimizing internal costs.
Apply rigorous risk management. Given the growing operational and financial risks of large-capex projects, owners need to assess and mitigate risk at the strategic, portfolio, and project levels.
Develop a procurement excellence program. Project owners should create an integrated procurement model to efficiently manage market uncertainties. By improving its approach to procurement, a global mining company cut its procurement budget by 10 percent.
Optimize the contracting strategy. Contracting needs should mesh with the project developer’s capabilities and the individual project's requirements.
Secure scarce resources and local content. Critical resources include human capital, infrastructure, commodities, natural resources such as water, and critical equipment.
Ensure excellence in construction. Reduce waste, errors, and nonvalue-adding activities that significantlyaffect costs and project schedules.
Set up a project management office. A PMO can oversee project governance, design, and execution. Nearly 30 companies are applying BCG’s PMO approach to 50 programs, realizing value in excess of $25 billion in 2010.
Effectively managing large-capex projects in today’s uncertain environment—where costs, complexity, and risk are increasing, financing is drying up, and resources are becoming harder to secure—is a significant challenge. The BCG LPM Octagon can give project owners and contractors a clear edge, helping to ensure that their large projects come in on time, on budget, and at the required quality standards.
A copy of the report can be downloaded at www.bcgperspectives.com.
To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or firstname.lastname@example.org.