Robert Dobrowsky Robert Dobrowsky
Partner

Significant Capital Expenditures Require Disciplined Project Management

October 1, 2015


After 5 yr. of sustained economic improvement, many businesses have implemented major capital expenditures to drive growth and ensure long-term viability. Reasons for deploying these projects include:

• Geographic expansion, domestically and overseas;

• Customer diversification;

• Vertical integration;

• Product-line expansion; and

• Technology advancement.

Our metalforming-industry clients fit this bill, having made recent investments in Mexico, for example. Relocating near new OEM assembly plants requires capital for factories and equipment. We’ve seen an increase in the number of new presses coming online, specifically servo-driven presses. 

Large up-front investments like these make it more critical than ever to ensure that managers carefully plan and execute new capital projects. Implemented successfully, capital expenditures can create competitive advantages, improve EBITDA and shareholder value, and offer benefits for company employees such as career advancement, stretch assignments and bonuses.

However, today’s industry dynamics make the risks associated with large capital expenditures greater than ever. Capital projects can become quite complex, often spanning international borders, requiring a deeper set of interdependent suppliers and subcontractors, and rapidly shifting technology systems.

With these factors at play, merely assuming that all will go according to plan can threaten project delivery and in some cases put the entire business at risk. To reduce the risk of project failure, it’s important to challenge your assumptions as well as their related risks and dependencies. Consider these questions:

• What happens if the project goes over budget—by 5, 10 or even 20 percent?

• How would a delay in project completion impact the company?

• Does the success of the project rely on just one or two key employees?

• Will the project affect existing operations, and have you developed adequate contingency plans?

• How aggressive has management been with its key assumptions—if not with more than 90-percent certainty, have you considered the financial impact to your capital structure or working capital?

• Have you identified all of the potential risks to project success, and developed adequate mitigation plans that your team is ready to deploy?

• How much visibility do you have on progress to date, and do you have clear measures in place to monitor progress and quickly intervene to course-correct?

• Can you adequately monitor and manage third parties that play a critical role in completing the project?

• How well do resource needs match resource availability?

Risk-Proof Your Capital Investment

Responsibility for effective capital-project management falls on the shoulders of senior management, and requires a multidisciplined approach. Best practices include:

• Failure analysis. Using a systematic approach, ask: What could go wrong? How will this impact the company? What can we do to plan for failures?

• Project management. Identify major assumptions, risks and dependencies, and develop detailed project activities—who (resources), what (actions) and when (timing/sequencing).

• Pressure-testing your forecast and budget. Critically examine the budget, schedule and forecasts, and model the risk impact and related mitigation costs.

If you’re considering a new capital project, be sure to dedicate the necessary resources within your organization early-on to review the project plan.  The project may run smoothly as planned, but it’s good to have the resources in place to help clear any obstacles encountered along the way. MF
Industry-Related Terms: Model, Run
View Glossary of Metalforming Terms

Technologies: Management

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