Global spending on capital projects returns to pre-recession levels

A new report from A.T. Kearney has found that companies are spending as much money on capital projects as they did before the recession, but that bump in spending is bringing with it new challenges.

 The report, “ExCap II: Top-Level Thinking on Capital Projects,” is a study of best practices in managing capital projects across their entire life cycles. This is the second edition of the study, and it found that although capital spending has recovered since the 2008-2009 recession to $11 – $12 trillion annually, the challenges pose major risks to large capital project economics.

Many of the pre-recession capital project issues are returning including resource scarcity, cost management, and underleveraged project portfolios. The study found that 23 per cent of capital projects do not meet the required financial return threshold.

The study also found inconsistencies in three areas:

• Resource availability: Although the world faces high levels of unemployment (+8 per cent in the U.S. and + 11 per cent in Europe), there is a significant lack of engineering and project management talent available to capital project managers.

• Capital availability: Although poor project discipline results in budget overruns of 5 to 10 per cent, capital project managers consider capital availability a major constraint.

• Leadership’s understanding of capex issues: An overwhelming majority of senior managers believe they have the right capex organization, processes and performance levels, yet project performance is often poor.

The study also found that the leading companies have improved their capital project processes and performance issues since the 2008 study. There are three themes that distinguish the leaders, including:

• Bigger role for senior management: Senior management at leading ExCap II companies play active roles in capital projects, at all stages and in all aspects of the project.

• Advanced Risk Management: Leading companies stand out based on how they identify and prioritize risks. They improve risk management at every step – identifying, quantifying, tracking, and mitigating threats.

• Portfolio view of projects: The leaders in the study look at their projects as a portfolio. At the design stage, they edit out the variations and opt for maximum commonality.

To read the full 2012 A.T. Kearney ExCap II Report, please visit www.atkearney.com.