Projects involving large capital expenditures, such as the development of oil or natural-gas fields, power plants, and metal-ore mines, have become significantly more challenging in recent years. Demographic shifts and the industrialization of large developing economies have led to greater demand for energy and raw materials, and for increased production.
These resources are increasingly sourced from less accessible parts of the world, often in emerging markets, where business operations face unique challenges. In addition, promising markets attract multiple competitors, further raising development costs at a time when credit is less available than in the past. Dramatic swings in commodity prices also affect the economics of large-project development.
Here are eight rules to follow for effective large-capex project management:
Avoiding wasteful spending is a companywide goal with significant potential return. The principles involved in a successful capex-reduction program include having a culture that challenges projects in their early stages; standardizing as many processes as possible; achieving beneficial effects of scale; and seeking “convoy effects” by developing similar projects consecutively or in the same location.
The definition of “value” differs from company to company for engineering, procurement, and construction contractors, which means attention must be paid early to factors such as initial cost, reliability, and long-term cost when designing offers. Using optimized technical specifications, modular approaches, and upgraded designs can boost relative value.
As the risks of large-capex-project development grow, a comprehensive risk-management program becomes more critical for project owners. Programs should apply a tiered approach that assesses projects not only at the individual project level but also for the entire project portfolio and from standpoint of the companywide strategy.
Procurement can make or break a capex project. The single most important means of procurement improvement is category optimization to ensure that the most important supplies are given the highest priority. Other principles such as systematic supplier management, effective order bundling, and standardization can also help.
Swings in the economy can give an advantage to either a project developer or to contractors, but both may benefit from longer-term arrangements that reduce the potential for conflict. Project managers need to carefully define goals and analyze market conditions during the planning phase, so they can use that information to create a shortlist of potential contractors.
Where growth is booming, project resources can quickly become hard to find. That applies to human capital, natural resources, and equipment. Developers must identify needed resources early and implement the strategies and contacts needed to make sure they are available.
It’s harder to implement lean and efficient processes on a construction site than in a factory because every site is different. But managers can work to reduce bottlenecks, ensure that materials are available, and use “review gates” during the process to minimize errors and defects.
A dedicated and well-structured PMO can help define project governance responsibilities, identify the major elements of process design, and control critical elements of project execution.