Capital Project Risk Management: Foundations for Mastery

At a time when large capital projects are becoming more necessary as a path to growth in certain industries, they are also prone to a greater range of risks.

Accenture believes that mastering capital project risk management will give companies involved in such projects increased capacity to minimize these risks and maximize the benefits. Accenture identifies the four foundations for attaining mastery of capital project risk management.

The future growth of many organizations and industries—including infrastructure, energy, utilities, mining, and chemicals—depends upon the successful implementation of increasingly large capital expenditure programs. After a period of under-investment—exacerbated by the economic crisis that began in 2008—companies in these industries are undertaking significant projects.

While capital projects have always involved large expenditures with often long payback periods, these structural dynamics are increasing project complexity. Companies are undertaking larger and more complex projects in new geographies, working with new partners and using new technologies. All of these factors add complexity and risk to already difficult undertakings.

Capital projects are becoming more exposed to intricate and interrelated risks including:

• Regulatory
• Geopolitical
• Technical
• Supplier and contractor
• Governance
• Financial
• Reputational

These risks are real, and the stakes are high. In the current economic environment, there is a strong need to ensure that returns on capital employed for such projects are maximized. For example, senior energy executives estimate that more than 40 percent of oil and gas capital projects are delayed, with the average delay estimated about 12 months. This results in the erosion of net present value while affecting portfolio performance and capital effectiveness.

Capital project risk management is, at a minimum, a way to improve project performance time, budget and schedule. When it is embedded throughout an organization, it can form the core of capital effectiveness and therefore be a source of competitive advantage.

The benefits of capital risk project management include:

• Timely completion of projects.
• Minimization of cost overruns and delays.
• Smoothing of cash flow.
• Increase in decision-making capability.
• Earnings at risk are linked with predictable profitability.
• Maximization of share prices as markets reward a company for consistently meeting deadlines.

We have identified four key foundational principles that are necessary to effectively manage the risks associated with capital projects. When these are in place, companies are in a position to ensure that the risk management of capital projects is a core element of capital effectiveness and high performance.

• Foundation One. Run capital projects like a business. As part of this process, align risk management with strategy and project delivery; get the organization right; and manage suppliers effectively.

• Foundation Two. Align project partners by getting the governance right and paying extra attention to non-operated joint ventures.

• Foundation Three. Manage “above ground, non-technical” risks by measuring them and ensuring accountability and decision-making authority.

• Foundation Four. Use strategic objectives to define quantitative approaches. To this end, ensure modeling approach and results are understood by decision makers, and use models to stress test risk exposures.

Once an organization is able to apply the four foundational principles effectively and consistently across a number of projects, it will be in position to use risk management to contribute to greater capital effectiveness, thus demonstrating mastery of this vital discipline.

Aliette Leleux is an executive director–Risk Management, and is Accenture’s corporate finance and treasury lead for France. Based in Paris, and with more than 17 years of global consulting and industry experience in risk and finance, Leleux guides large conglomerates and forward-thinking organizations in the finance, resource, product and public sectors in transformation projects and assignments.
 
Ben Cattaneo is a manager in Accenture Risk Management and works within Accenture’s Cross-Industry and Resources team. Based in London, he possesses more than 12 years of experience helping clients manage the risks associated with complex capital projects, design and implement enterprise risk management programs, and manage acute crises. He offers a combination of deep risk management experience and strategy and change management skills.

The authors would like to thank Phil Herschke and Craig Murray for their contribution to this publication.