3 Ways to stop your capital projects from running over budget
A growing organization will at some point hold a substantial real estate portfolio to support its operations. Think about your office space for housing employees, commercial space for serving your clients or showcasing your products, and buildings that support your manufacturing and back-end operations. Every year, you initiate a variety of projects to support business cases, ensure preventive maintenance and address major risks to your real estate assets.
Nobody approves a $2M project expecting it to cost $3M. That is a 50% budget variance, which is poor project delivery performance. Here are 3 reasons why your project delivery is in silent chaos, and how to fix each one.
You have no internal benchmark system in place
You approve budgets based on estimates not meant for project authorization
Your project management has drifted from first principles
Benchmarking as the foundation
Long before the advent of so-called "artificial intelligence", data-driven decision-making was the goal for a good number of organizations. And you can't achieve it unless you track project performance, run cross-analyses, and identify where performance is great and where it is poor. In the Juran Quality Handbook, benchmarking is “a systematic and continuous process that facilitates the measurement and comparison of performance and the identification of best practices that enable superior performance.”
If you deliver 30 or more projects per year, you are missing a business opportunity if you don't have a benchmark system in place. Some time ago, we were asked to assess existing benchmarking for a client. They delivered many roof replacements per year, and the only data they kept was the actual costs per project, and the cost of the roof program, per region. That is not benchmarking.
You can't achieve benchmarking without addressing the cost driver (e.g.: roof area), the unit cost metric ($ per square foot of roof) and the main cost categories (e.g: design, construction, fees). With that in place, you know what to expect for your next projects, and you know what the thresholds for good and poor project delivery performance are. With a benchmark system, you can have a report to act on every quarter, or at least every year.
Lastly, you also need to track your budget variance at various milestones of project delivery to ensure it is aligned with best practices for classes of cost estimates. Don't forget to act on your results: set initiatives to learn from the great performers and improve the poor ones.
Only approve projects with a Class 3 cost estimate or better
You cannot complete any project planning without clarity on the budget estimate. Once approved, that becomes the budget. Accounting best practices require organizations to ensure authorized projects are aligned with their business risk profile and business objectives. Most teams, whether asset management, corporate real estate or operations, have a short window to present their projects for approval.
Approving a pseudo budget estimate is starting off the wrong way. You should only approve projects with a Class 3 cost estimate or better.
Cost estimates are not predictions or certainties. They carry cost risks; otherwise, they are pseudo estimates. Professionals and cost engineers who develop estimates usually communicate these cost risks. Best practices in the building industry identify five classes of cost estimates, from Class 5 to Class 1. Class 5 has an expected accuracy of -30% to +50%, Class 4 of -20% to +30%, Class 3 of -15% to +20%, Class 2 of -10% to +15% and Class 1 of -5% to +10% (AACE 56R-08 Recommended Practices and ASTM E2516-11).
A Class 5 cost estimate is meant for project screening and feasibility studies only. So, a $2M Class 5 budget estimate can be expected to cost up to $3M. That is too risky for project authorization, which is why best practices recommend authorizing a project with a Class 3 cost estimate or better. In this case, a $2M Class 3 budget can be expected to cost up to $2.4M.
One of the advantages of a Class 3 cost estimate is that it can provide you with a reasonable amount of detail and breakdowns. It might be a little time-consuming to develop such an estimate, especially if you don't want to spend a significant amount of money as seed funding. But with the right tools and assistance from cost engineers, it is possible to get your Class 3 cost estimate. It is what many cost intelligence companies do for a living, including ours. But it is possible for most organizations to build similar capabilities and more.
Classes of cost estimates in the building construction industry are defined in ASTM E2516-11, for your reference. Get aligned with best practices.
Return to the first principles of project management
Even if you have a proper benchmark system and approve projects with a Class 3 cost estimate, your projects can still descend into chaos if your project management is not effective and efficient.
Project management is not merely about collecting invoices from contractors and suppliers and ensuring they get paid. Most people forget the original raison d'être of project management. Even if you forget, for instance, the Gantt chart and the CPM methodology, remember that project management is about delivering value. Project management is "the application of knowledge, skills, tools, and techniques to project activities to meet or exceed the intended value" (PMBOK® Guide – Eighth Edition).
Your focus should not be only on last month's project actuals and forecasts, but also on the value narrative. Consider tracking your schedule performance and your value metrics as well. Train your project managers in the best practices of cost control, scheduling and value optimization. Don't take for granted that your project management policies are read and implemented. Project audits and benchmark reports can help you identify those who need the most training.
Ensure you have the right people in the right seats on your project delivery bus.
Capital Decision Intelligence
At Xenofan, we believe that every dollar invested in the built environment shapes businesses, cities, and productivity. Therefore, every capital decision must be informed before commitment; otherwise, it is too late. If you want to increase your project delivery maturity level, having a benchmark system in place is required. Approving only projects with a Class 3 cost estimate or better is non-negotiable, and returning to project management first principles is imperative.