Capital Projects

A real-world framework for driving capital project success

Capital Projects provides an empirically-based framework for capital project strategy and implementation, based on the histories of over 20,000 capital projects ranging from $50,000 to $40 billion. Derived from the detailed, carefully normalized database at preeminent project consultancy IPA, this solid framework is applicable to all types of capital investment projects large and small, in any sector, including technology, life sciences, petroleum, consumer products, and more. Although grounded in empirical research and rigorous data analysis, this book is not an academic discussion or a conceptual dissertation; it's a practical, actionable, on-the-ground guide to making your project succeed. Clear discussion tackles the challenges that cause capital projects to fail or underperform, and lays out exactly what it takes to successfully manage a project using real-world methods that apply at any level.

Businesses report that 60 percent of their projects fail to meet all business objectives, and IPA's database shows that projects' final average net present value undershoots initial estimates by 28 percent. This book provides concrete, actionable solutions to help you avoid the pitfalls and lead the way toward a more positive outcome.

• Avoid the missteps that make capital projects fail
• Learn the specific practices that drive project success
• Understand what effective capital project management entails
• Discover real-world best practices that generate more value from capital

When capital projects fail, it is almost always preventable. Inefficiency, underestimated timelines, and unforeseen costs are the primary weights that drag a project down—and they are all avoidable with good management. Capital Projects gives you the insight and practical tools you need to drive a successful project.

Acknowledgments ix

1 Falling Short of Expectations: How Executives Struggle to Deliver the Value from Their Capital Projects 1

Background and Basis for the Book 5

Capital Projects Create Value 6

Most Projects Create Less Value Than Expected 7

Results Apply to All Types of Projects 7

Sources of Value Erosion Are Not Limited to Cost and Schedule Overruns 8

How to Deliver the Value Promised 10

2 Why the Stage-Gate Process Is the Best Tool Executives Can Use to Get the Most Value from Their Capital Projects 15

A Necessary Process 19

How Does the Process Work? 20

What Is the Role of Executives in the Process? 25

Stage-Gates and Executive Control 29

3 The Project Frame: Understand the Opportunity before Starting a Project 31

Typical Contents of a Project Frame 34

Unlock Value by Finding a Better Option 35

How to Develop a Project Frame 37

Use the Frame for Executive Alignment and Endorsement 45

4 The Critical Project Sponsor Role 51

Who Is the Project Sponsor? 56

Overview of Project Sponsor Role 58

Assign a Project Sponsor as the Initial Business Case Is Developed 59

Requirements for a Strong Project Sponsor 59

Choosing the Right Project Sponsor 69

5 The Single Most Important Thing an Executive Can Do to Make Any Capital Project Succeed: Define Clear Objectives 75

Business Objectives versus Project Objectives 79

Developing Clear Objectives 79

Communicating the Objectives 84

Prioritizing the Objectives 87

6 The Executive’s Role in Building and Supporting High-Performing Project Teams 91

Executive Leaders Lead 94

Invest in a Strong Owner Project Team 96

Why You Need a Functionally Integrated Team 97

Help the Project Manager Get the Resources for a Functionally Integrated Team 99

Do Not Outsource the Owner Team Role 100

More Experienced Project Teams Do Better Projects 102

Strategies for Coping with Staffing Shortages 102

Executives Working Together to Support the Project 104

7 Project Definition: The Fundamental Capital Project Concept Every Executive Must Understand 107

Strong Project Definition Preserves Value and Produces Better Assets 112

Executives Control the Quality of Project Definition 115

Understand the Cost of Weak Project Definition 116

Be Careful When Trading Fast Schedule for Strong Project Definition 118

Reduce the Number of Schedule-Driven Projects 122

More Project Definition Is Not Necessarily Better 122

8 It’s Going to Cost How Much!?! A Guide to Help Executives Avoid Capital Cost Surprises 125

Key Concepts to Understand about Capital Cost Estimate Accuracy 128

Factor the Cost Estimate Range into Decision Making 129

Improve Project Definition to Narrow the Cost Estimate Range 136

Follow These Rules to Get Contingency Right 140

9 Using a Project Steering Committee to Improve Executive Decision Making 147

How to Build a Strong Steering Committee 150

Who to Include in the Steering Committee 152

Run the Steering Committee Efficiently 154

Make Decisions at the Right Level 155

Do Not Dilute Project Sponsor Accountability 156

10 Risk Management: A Mechanism to Understand Project Risk and Decide What to Do 159

Risk Management: Identify, Analyze, and Manage Individual Risks 164

Practices for Getting the Most from Risk Management 166

Scrutinize Risks to Decide Whether They Are Worth Taking 167

Understand That the Estimate of the Risk Is Probably Too Low 168

Be Careful with Making Late Changes in Response to Business Risk 169

Strong Risk Management Does Not Substitute for Strong Project Definition 171

11 Approve, Recycle, Cancel, or Hold: Making Good Stage-Gate Decisions 173

Capital Investment Decisions Are Made at the Stage-Gates 176

Three Gates Provide Adequate Control 177

The Business Question Asked and Answered at Each Stage-Gate 179

Use Your Early Stage-Gates Better 180

Four Choices for the Stage-Gate Decision 181

Information Used in an Investment Decision 182

Rules for Strong Gates 183

The Slippery Slope of Granting Exceptions to Stage-Gate Deliverables 189

12 Executive Role, Executive Control: 12 Essential Rules 193

Rule 1: Use the Stage-Gate Process 195

Rule 2: Start by Framing the Project 195

Rule 3: Ensure Project Sponsor Involvement 196

Rule 4: Develop Clear Objectives 196

Rule 5: Invest in Owner Teams and Provide the Support They Need 197

Rule 6: Reach a Strong Level of Project Definition 198

Rule 7: Factor the Accuracy of the Capital Cost Estimate into Decision Making 199

Rule 8: Set Contingency in Accordance with Project Risk 199

Rule 9: Build an Effective Steering Committee 200

Rule 10: Use a Robust Risk Management Process 200

Rule 11: Keep the Stage-Gates Strong 200

Rule 12: Be Coachable 201

Glossary 203

Index 207

PAUL BARSHOP, Director, IPA Capital Solutions, provides hands-on support to companies who are seeking to realize more value by enhancing their capital project development and delivery systems. Previously, he served as both IPA's chief operating officer and director of its Europe, Middle East, and Africa region. He has authored numerous articles for industry trade journals and IPA subscription newsletters.

When a company invests in a capital project, a lot is at stake—often times, an executive's job. Substantial company resources are on the line to develop, improve, or refurbish an asset so it can generate profit, but the typical odds of success are only slightly better than a coin flip. Capital Projects gives you unprecedented access to one of Independent Project Analysis's (IPA's) leading researchers and his world-class guidance and solutions for achieving every objective of your capital projects.

This comprehensive guidebook is for every executive who doesn't want to rely on chance to accomplish goals. Inside, you'll find concrete methods for reaching your project objectives, ensuring your project portfolio hits its numbers, and avoiding the most common pitfalls and disasters. Culled from IPA's carefully normalized project databases containing 20,000 capital projects ranging in size from $50,000 to $50 billion, this proven toolkit of best practices puts unrivaled industry knowledge at your fingertips, whether you're undertaking incremental expansions, introducing new products or services, or building a brand-new production facility in any part of the world. Take this everyday resource into the boardroom with you for the support and hard evidence you need to effectively organize and manage your team from the planning stages to day one of operating the new facility. Everything you need to make a name for yourself leading capital projects is here, including:

• A road map to using the stage-gate methodology to maximize the value of capital projects, including how to make the best decisions at each gate
• Convenient tools, checklists, and rules of thumb for unlocking the value in capital projects, choosing the best project sponsor, avoiding capital costs surprises, and more
• Dependable, practical techniques for enhancing executive decision-making through the steering committee and developing high-performing project teams

The broad cross-section of capital projects used to illustrate the paths to achievement represents many diverse industry sectors, including petroleum, minerals and metals, and chemicals, as well as life sciences, nutrition, and consumer products. Through this encompassing examination, you will gain a deeper insight into the critical alignment of business and project objectives needed for positive growth.

Take control from the start and deliver the expected value from your projects with Capital Projects, the real-world guide to beating the status quo.

THE AUTHORITATIVE FRAMEWORK FOR LEADING PROFITABLE CAPITAL PROJECTS

Capital Projects is the A-to-Z guide for directing, supervising, supporting, and ultimately profiting on all types of capital investment projects in any industry.

Senior leadership and project sponsors no longer have to settle for disappointing returns or catastrophic failures. This practical guide from one of the leading minds at Independent Project Analysis, the preeminent consultancy for capital projects excellence, gives you a succinct road map of best practices boiled down from an extensive database of real-world projects. Regardless of the project's size, objectives, or the industry it operated in, the principles and tools inside this book all produced successfully managed projects that resulted in real bottom-line growth.

If you've been burned by poorly operating assets that do not work right, missed market windows due to late projects, or watched as costs ran out of control, this single resource will give you peace of mind by greatly improving the chances of success. It shows you how to take control right away by finding the most value in the capital project, precisely defining the business objectives, and ensuring all potential conflicts between objectives are identified and resolved. Set yourself up for a win by:

• Mastering the real-world best practices empirically proven to deliver project success
• Proactively recruiting and developing the teams who enable you to deliver more value from your projects
• Avoiding the repeated missteps that cause all types of capital projects to fail

Decisions are made in the boardroom but action takes place in the field—Capital Projects is your go-to guide to taking a project from paper to operational and hitting the best real numbers.

This is IPA's second Wiley book on capital projects. It follows the widely influential book Industrial Megaprojects: Concepts, Strategies, and Practices for Success by Edward W. Merrow, IPA's founder, CEO, and President. This book covers all types of capital projects and explains the critical role executives have in making a project a successful business venture and how easily their actions and decisions can lead to a project disaster.