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6 Capital Project Budget Busters

In my involvement of 500 plus capital projects, hitting the budget is rare. The reasons for missing the mark are almost always the same and avoidable. For all companies investing in new capital, meeting budget targets is a critical component of the justification. Investing the company’s funds in new capital projects is similar to our individual investing in a stock. The individual makes the investment expecting a return on the investment. The biggest difference between capital investment and equity investment is that a capital investment can be in the business’s control. This is true only if the person managing the project has an understanding of how to keep the project on track and within budget. The project was justified based on a budget, so to maximize the return on capital it must meet the budget. Here are the major reasons a capital project budget gets busted.
1. Timing – The number one reason without a doubt is a lack of time to properly execute the project. The project should take six months but is required in three months. This is what happens:
a. Limited due diligence in selecting a vendor and as a result, the vendor that commits to an unrealistic timeline usually wins the business. Several years ago, a customer of ours had a major project that included two assembly lines valued at nine million dollars. We were eager to support them on the project. The problem was they needed the equipment in 30 weeks. We estimated the best case, it was a 48-week project. The customer desperately wanted to work with us, but there was no way to meet the timing, so we said “no”. They found a company that said “yes” and 52 weeks later, they received the equipment. They have been battling it ever since and vowed to never use that vendor again.
b. Poor design of equipment – “Just get it done” is the motto for hitting an unrealistic timeline. As a result, corners are cut, and it is often in the design phase. Custom equipment designs should be thoroughly reviewed by stakeholders to ensure they are robust and as simple as possible. Complicated designs are much harder to troubleshoot than simple ones.
c. Limited debug – The debug phase for custom equipment build is the most critical aspect of the project. If sufficient time and parts are available by the time the equipment reaches your floor, it will be ready to go. Projects with a short fuse never allow for sufficient time to dial the equipment in. As a result, everyone gets egg on their face.
I would be remiss to not mention the number one reason projects are kicked off late: management. Indecision and budget approval are the biggest excuses for turning a project into a fire drill. The frustrating part is that the people that truly caused the chaos in their business are never held accountable. So, the cycle continues (especially true in the automotive world) – ready, ready, ready…okay, go, go, go! The feedback loop is broken.
2. Poor Vendor Selection – I touched on this in the discussion about timing. My number one piece of advice is if it sounds too good to be true, it probably is. I realize this is trite, but it is true. The temptation is always to go with the lowest bid or the fastest lead time, and often the same company has both. It is critical that companies use a decision matrix and have clear criteria outlining the ideal vendor. When companies select the right vendor, it frees them up to work on other important activities. When a poor vendor is selected, you must use all of your energy to bail water out of a sinking ship. Example: We had a customer that made diesel fuel filters. They asked us to quote equipment for an upcoming project. It was behind schedule already, of course. The competitor had almost no experience building large-scale automation projects. It was a $1.2 million project that involved integrating some fairly complex technologies, including leak and functional testing. There was also significant model variation that would require an experienced mechanical design engineer. They chose the inexperienced company because they promised a faster delivery and a lower cost. You can guess what happened. The project was six months late and never functioned as required. It was a train wreck because they chose the wrong partner. The reason they chose the wrong partner is because they were not intentional in defining the right partner. To avoid this scenario from occurring at your company, do the following:
a. Gather stakeholders into a room (quality, maintenance, operations, etc.) and define the ideal partner.
b. Create a Decision Matrix with the criteria you just outlined, including a weighting system. Contact me for a sample: Russ@capexsales.com.
c. Develop a detailed specification for every project. Contact me for a sample: Russ@capexsales.com.
3. Design Changes – Most programs have parallel paths with design of product and the need for equipment to launch. Designing equipment for a product that continues to change almost always ends up costing money and delaying the project. Remember that as a capital project manager, your main responsibilities to ensure the promised return on capital, are cost and timing. If the design is not frozen and you have to start the project, you must be creative to avoid costly redesigns. Design changes for new products take time because they must be tested or validated before they are implemented. If you must move forward, here are some tips to help minimize the disruption:
a. Include the design engineer in your project discussions. This will help them understand the necessary urgency for framing up the design.
b. Work with the design engineer to understand what areas of the product design are likely to change. Armed with this information, you can ask your vendor to avoid designing tooling and processes that are directly affected. This allows the vendor to push forward with design of the equipment. However, at some point, they will have to stop because they catch up to the non-frozen areas of product design.
c. Make certain to let management know what is going on with the design of the product and its effect on your project. Ultimately, management is responsible and has the authority to direct resources in an effort to keep things on track. As a capital project manager, your responsibility is to keep them up to speed with the project and anything that could have an adverse effect on the cost and delivery.
4. Lack of Parts – Parts are critical for properly debugging equipment. However, debug parts are also very expensive, so the tendency of every company is to skimp on debug parts. This is a major mistake because the launch of equipment that is not sufficiently debugged can cost far more money and resources than money invested in debug parts. The phrase “Pay me now or pay me later” is applicable when considering debug parts. The reasons for not preordering sufficient quantities of the debug parts are the following:
a. The design continues to change, so part suppliers are not able to tool up for production.
b. There is no budget or insufficient budget allocated to debug parts.
c. The timing has caused all suppliers to be on parallel paths with the launch of production. This means the debug parts aren’t available until the time for you to start building them for your customer.
5. Inadequate Budget – This starts with your company’s sales process. Some companies don’t involve the plant engineers in the quoting process. The goal is to win the business, and that requires competitive pricing. Often this means the sales team will low ball the capital costs to win the business. This compromises the entire program and is equivalent to showing up to a fight with one arm tied behind your back. The outcome isn’t going to be good. Of all the budget busters, this is the most avoidable. Here is how:
a. Get involved in the quoting process. You have experience and know the general cost and timing for the equipment required. Maybe you can add the new project to existing equipment, which would make you even more competitive.
b. It is likely that the production processes are similar to previous programs. Create a template with general pricing so that you can quickly provide budget numbers for capital equipment to your sales team.
c. Let stakeholders know up front if the funding that has been allocated for equipment is not adequate. It is critical for your growth in the organization that you alert stakeholders of potential risks in executing a project.
6. Inexperienced or Untrained Project Managers – There is no class in school that teaches how to manage a capital project. This skill is most often developed through experience and tribal teachings. In my experience, there is no faster way to sink a project than by having an incompetent project manager. Creativity is important for innovation and is often lacking in the manufacturing world that I live in. There is however, a big difference between a dumb idea and creativity. Having an inexperienced person manage a major project is equivalent to giving a teenager $10,000 and expecting them to do the right thing. It is not guaranteed that they won’t, but the odds are stacked against you. I have developed a training course for capital project management. In the Capital Project Mastery course, we cover all aspects of capital project management, including those aspects discussed in this article. Please visit www.CertifiedCPM.com to reserve your spot.
We started this article with an explanation of why hitting the budget is important to your company’s success. Companies invest expecting a return on the investment and if the return is not achieved, they have failed. Your company’s management is held accountable for wisely investing the business’s resources. If they are to succeed at their mission, you must manage the project to completion within the budget constraints in which it was justified. When you do this, it makes them look good and when you do that, you look good. If your long-term desire is to grow in your organization, you can stand out by professionally and effectively managing your next capital project. I can help.

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