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Capital projects life cycle - Focus areas for effective capital project life cycle - EY - Global

Capital projects life cycle

Focus areas for effective capital project life cycle

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Summary: Oil and gas companies are increasingly focusing on the entire life cycle of a project. To ensure success they must start the process early and hold high standards surrounding cost, schedule and execution.

Looking closer at the focus areas for effective capital project life cycle management

These are some of the capabilities that, when executed well, can prove to be game changers on large capital projects:

  • Effective project management: : Make sure the plan includes appropriate focus on safety, costs and schedule — attributes that need not be mutually exclusive. All parties involved should be in alignment with the baseline schedule and must understand the project's critical path. Critical milestones play a major role in maintaining momentum; developing a continuum of optimistic, realistic and pessimistic potential completion dates based on actual progress can help maintain focus on the project.

  • Cost management and cost reduction: The best strategy is to develop an integrated cost management function. It should align all cost-related processes and functions and incorporate data developed or maintained in other processes. Place emphasis on budget control, approved corporate budget changes and project management internal budget transfers.

    Expenditure tracking should include actual cost to date, accruals and total cost incurred. Look for cost reduction opportunities, along with opportunities to reduce planning budgets, engineering hours and cycle time, at every stage of the life cycle. Pay particular attention to the larger line items in the construction budget and operate with a mentality that helps promote accountability.

  • Supplier performance management: An improved approach to risk and exposure on costs and delivery and improved management of stakeholders and suppliers can help optimize third-party performance and keep relationships with stakeholders on an even keel. It is important to analyze the contractor's baseline as-planned schedule and its cost loading, including the complete scope of work, and to identify the contractor's critical path and contract milestones. Risks and estimates of impact must be identified, especially for critical and near-critical activities.

  • Healthy stage-gates: Develop a holistic capital projects program with a stage-gate model for evaluating progress and enabling informed decisions about next steps. In addition to minimizing rework on front-end engineering and design, improving cycle time and generating punch lists for handoff maintenance, this disciplined decision making framework is designed to move projects through the development pipeline to facilitate more effective planning and evaluation of projects, which will translate into better capital effectiveness.

    Early involvement in the process from all disciplines and cross-functional participation throughout the development process will result in better integration and alignment of activities.

  • Risk assessment and reduction: : To help ensure a satisfactory degree of success, project teams must control costs, ensure quality delivery, meet deadlines and identify and mitigate future risks. Juggling such diverse and often conflicting objectives is a major challenge. The capital project team is often too close to the day-to-day activities to be able to take an objective view of performance.

    Consequently, shortcomings are often recognized too late, by which time overall objectives in terms of cost and quality are jeopardized or schedules slip, affecting both business strategy and operations. This is when projects can erode, rather than support, the creation of business value.
  • Safety: : Safety risks evolve throughout the capital project life cycle, so those risks must be considered at each stage of development. Engineering and procurement personnel must make decisions that allow for the safe construction of the project as well as its safe operation. Construction and operations personnel must be trained properly, comply with safety regulations and processes and utilize the safety controls provided. Equipment or control failure could impact personal safety as well as hinder the operations of a facility.
  • Handover management: : To avoid the impact of poor handover management, operating teams must be mobilized at the right time and given ample opportunity to work with the project team at appropriate stages in the project life cycle. Likewise, equipment needs to be easily serviceable and maximize commonality wherever possible, with bills of materials, and operating and maintenance instructions accurately captured and readily accessible.
  • Regional execution: : Integrated oil companies and national oil companies are increasingly investing in new projects through joint venture arrangements, with the national oil companies offering more concession agreements to the integrated oil companies for the rights to their reserves. These agreements are perfect candidates for comprehensive risk reviews. The integrated oil companies need the growth to offset stagnant home territories, while the national oil companies need to generate more income for their burgeoning populations and budgets while diversifying their economies.
  • Total cost of ownership: : I: The total cost of ownership (TCO) for a capital project includes the total of all costs to design, purchase, construct and operate. Most of the costs for these elements can be internal or indirect costs paid to external parties. Furthermore, costs to prepare bid lists and equipment specifications are easy to identify whereas some other variables, such as operating costs and lost profit opportunities, are much more difficult to identify.
  • Governance, controls, policies and procedures: Corporate boards, joint venture partners and other stakeholders expect their capital projects to be run with a governance model that enables transparency and reliable reporting. Owners must insist on the same. Processes and procedures must be proactively enforced by monitoring, detecting, preventing and reporting any actions that risk the confidentiality, integrity and availability of project information. Systems must be able to identify and manage current risks and evaluate current performance, including the appropriate use of resources.
  • Operating model design: Many different internal and external factors drive businesses to undertake organization redesign. The impact of their decisions can be both positive and lead to outstanding growth, or negative and lead to a further need to restructure. There is no single solution when designing an organization; a one-off solution is required in every instance. Numerous interdependencies need to be considered, including how affected stakeholders will be engaged and consulted during the process.
  • Contracting strategy: Contracting strategy goes beyond the pricing arrangement decision; it includes decisions about if and how to compete the work, how to segregate the project scope into various work packages, if and how to obtain financial guarantees from vendors (such as bonds or letters of credit) and how to allocate the risks and rewards of performance.

    Overall contracting strategy and approach should be determined after carefully considering the owner's capabilities, experience and ability to manage the chosen contract type. Contract language development, including critical operational, management and financial considerations, as well as the contract risk assessment is crucial to understanding the inherent risks of the finalized contract and developing management strategies to cover those risks.

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