In addition, current inflation could put an end to the historically low interest rates that companies are enjoying for financing their projects. As a result, only a few organizations have been able to maintain a through-cycle perspective. The reliance on just a few experienced people when travel restrictions necessitated a remote-operating model further increased the complexity. At the same time, some organizations have had to make drastic cutbacks in capital projects because of difficult economic conditions. Governments are increasingly viewing infrastructure spending as a tool for economic stimulus, which amplifies the cyclical nature of capital expenditure deployments. Please email us at: COVID-19 pandemic has accelerated and magnified these challenges. If you would like information about this content we will be happy to work with you. We strive to provide individuals with disabilities equal access to our website. Notably, these occur in both the public and private sectors. In fact, cost and schedule overruns compared with original estimates frequently exceed 50 percent. Executives find it difficult to understand and predict the performance of individual projects and the capital project portfolio as a whole.Īcross industries, we see companies struggle to deliver projects on time and on schedule (Exhibit 2).
Second, capital performance is typically a black box. When it comes to capital projects, executives rely on a select few people with experience in capital delivery. First, capital expenditure is often not a core business instead, organizations focus on operating performance, where they have extensive institutional knowledge.
#Capital expenses code#
Cracking the code on capital expenditure managementĭespite the importance of capital expenditure management in executing business strategy, preserving cash, and maximizing ROIC, most companies struggle in this area for two primary reasons. This dynamic reinforces the age-old challenge for executives as they carefully allocate marginal dollars toward value creation.Ĭompanies can improve their odds of success by focusing on areas of the project life cycle-capital strategy and portfolio optimization, project development and value improvement, and project delivery and construction-while investing in foundational enablers.
In addition, ill-considered cuts to key projects in a portfolio may actually jeopardize future operating performance and outcomes.
Yet managing capital projects is complex, and many organizations struggle to extract cost savings. In our experience, organizations that focus on actions across the whole project life cycle, the capital project portfolio, and the necessary foundational enablers can reduce project costs and timelines by up to 30 percent to increase ROIC by 2 to 4 percent. This strategy is even more vital in competitive markets, where ROIC is perilously close to cost of capital.
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