Managing Capital Project Approval in Today’s Volatile Market
Seven keys to help AEC firms navigate potential budget landmines and project-killing issues
by Akshay Mahajan
5 minute read
It may not qualify for any “Most Difficult Jobs in America” lists, but let’s take a moment to recognize just how tough a task the people charged with getting budgets approved for capital projects have today, given the highly volatile internal and external conditions in which they are operating.
Prices for materials like steel fluctuate on an almost daily basis. Skilled workers seemingly are here one day, gone the next. Supply chains remain fickle. The geopolitical landscape is a tinderbox, poised to ignite. Interest rates and costs continue to climb as recession looms.
Yet through it all, for architecture, engineering and construction (AEC) firms and their customers, the show must go on. Capital projects must move forward — preferably on time and on budget, with a minimum of disruption and ultimately, a positive outcome, not only for the end user, but for the AEC firms involved and other stakeholders. Like we said, that is no easy task. But by proactively taking certain risk-mitigation measures early in the capital project approval process, project participants can dodge disruptions to keep projects on track in terms of scope and timing, minimize the impact of volatility, and hopefully preserve positive relationships among project stakeholders.
Having worked in and around the AEC industries for more decades than we care to count, experience tells us that the steps stakeholders take in the early stages of a capital project, before a budget is presented and the project is deemed a “go,” are critical to producing better outcomes on the back end, and throughout the duration of a project. In particular, we’ve found the following seven best practices and lessons learned to be critical to defusing some of the potential landmines that can disrupt the cost, schedule, quality and safety of a project, or even sabotage it altogether. In doing so, they also can also make life easier for the people involved in the budget approval process.
- Conduct thorough due diligence before proposing an initial budget. Everyone tends to fixate on that initial budget figure, which is why it’s crucial for firms to hold off on floating an initial budget until they’ve conducted thorough due diligence to answer all the key budgetary questions as completely as possible. To do so, be sure to get the builder — who should know local pricing for supplies, vendors, subcontractors, etc., better than anyone — closely involved to validate budget line items. It’s also important to get the builder involved early because they ultimately will be accountable for project cost.
- Define and fix project scope. Especially during volatile times like these, scope creep can torpedo a capital project. Preventing it requires bringing all the right parties to the table early in the project design process to gather input, understand needs and ensure everyone’s on the same page with scope and the corresponding budget. Too often we see unexpected scope-related issues bubble up that can lead to hurt feelings and set a negative tone for the project, such as when a client seeks to lock a builder into a budget line-item number, and the builder responds by building contingencies into the contract, causing tension between them. The more collaborative and complete the due diligence process is in defining scope, the less prone projects will be to any unnecessary dissension caused by scope creep, costly change orders, etc.
- Define the project’s business case and purpose. The best project outcomes tend to be those in which the client is clear on the purpose of the project (why the investment is justified and the value it is intended to bring), what the expected ROI is, why it makes sense to build it now versus later (costs aren’t likely to de-escalate to justify delaying the project, for example), why it’s a strategic fit, what their needs and their wants are with respect to the project, etc. In short, you’re defining the “Why?” behind the project.
- Bring the right stakeholders to the table early in the process. Collaboration and consensus-building among project stakeholders from the earliest stages of a project are key to keeping that project on track. That means ensuring that boards of directors, the project end user, architecture/design, engineering and construction firms, project managers, procurement and others have a voice and a role in decision-making, issue-resolution, etc.
- Communicate early and consistently. We can recall a recent capital project where the end user, an academic institution, set an inadequate budget for a project, in large part because they had not involved the builder in the process. Communications issues cascaded from there, causing tension among the parties and suboptimal outcomes that largely could have been avoided had the parties been transparent every step of the way. The lesson here is that you can’t kick the can down the road in these situations. As loathe as parties might be to share bad news about cost overruns, etc., they must do so to preserve trust and mitigate the collateral damage.
- Arm yourself with credible, fresh third-party data. As volatile as material and labor costs, supply chain dynamics and other budget inputs can be nowadays, firms must be ready with fresh, relevant, accurate and independently sourced data (from sources like ENR, McGraw-Hill, Associated General Contractors of America, government databases and the like) to justify and support why project costs are what they are. In the current climate, we’re seeing far more budget challenges than ever before. So be ready with the right data to support your case.
- Focus on value management. Ultimately, the goal of a project is to ensure it provides value to all the various stakeholders. Managing value (AKA value engineering) should be a point of emphasis throughout the process, with the goal of ensuring that all stakeholders bring their expertise to the table so that everyone understands and buys into the value the project is expected to deliver to each of them. At its best, value management is a transparent and collaborative process where the parties leave their egos at the door to align around the goal of maximizing and balancing all project objectives. The best time to begin value engineering is in the program and schematic design phase; the longer you wait, the higher the risk of increased costs and schedule delays due to redesign.
As many X-factors, what-ifs and elevated risks as AEC firms and other capital project stakeholders must manage to move their projects forward, the most effective way to counter extreme market uncertainty and keep a project on-track is to take a proactive, highly collaborative, we’re-all-in-this-together approach from the outset. Experience tells us that when project stakeholders sit back and merely hope for the best, the outcome usually falls well short of that.
Dennis Cornick has worked in the AEC business for over 40 years. He recently retired after 33 years with Gilbane, a 153-year-old global provider of facilities and construction services with an annual volume exceeding $6 billion. During his tenure there, Dennis led strategic and tactical initiatives, resulting in consistent sales, revenue, and profit growth. Akshay Mahajan is general manager, AEC, at Unanet.
Dennis and Akshay also recently collaborated on a timely blog post about recession-proofing your AEC firm. Check it out here.