Each year Independent Project Analysis (IPA) benchmarks small projects at a number of manufacturing sites around the world. When we examine the data from the sites we benchmarked in 2011, one trend is quite clear – capital spending is up! As the industry has emerged from the global financial crisis, the typical site is seeing an increase of 18 percent in its forecasted capital spend compared to last year, with some sites planning much larger increases. This is driven by a mix of growth projects and sustaining projects that were deferred during the downturn. Most of these sites will not just see more projects in 2012 than in 2011, but also larger projects.

 

Great news, right? It’s good to be busy and great to be growing.

 

Unfortunately, the data show us that we’re not on track to spend this capital effectively.

 

When we contrast larger site-based projects (US$1 million to US$10 million) with smaller ones (less than US$1 million), we see that the larger projects tend to perform slightly worse. On average, these larger projects had 6 percent worse cost performance than the smaller ones.

 

Why is this? Surely sites recognize the importance of these large projects and focus their efforts on managing them well.

 

Yes, sites do take these projects seriously. Larger site-based projects tend to get more resources, have better team development, and use better project controls. Where they go south is in their attention to site factors. The larger projects are no more likely to complete soil borings or a HAZOP review (when applicable) before authorization than the smaller projects. These gaps in site definition then lead to changes and higher costs during execution. Whereas a US$300,000 project may be able to skip soil borings without too much risk, a US$3 million project, which may have much more extensive foundation work, tends to suffer when soil conditions are poorly understood. Similarly, finalizing a HAZOP after authorization for a US$300,000 project may not cause any waves, but a US$3 million project is much more likely to incur costly design changes when that activity is completed after authorization rather than before. In other words, the work process that may lead to OK results for a “small” small project just doesn’t cut it for the “larger” small project.

 

What does this mean? If you’re a site that routinely achieves excellent definition regardless of project size, then now is a great time. You’ve got plenty of work and you’re on track to execute it well. But if you’re a site that isn’t sure how to handle the larger projects you’re seeing or a site that plans to take the same shortcuts that you do on smaller projects, you’re at risk of wasting a lot of capital.

 

Now that spending is up, let’s spend our capital well. Want to know how your site is doing? Contact me at pkulkarni@ipaglobal.com.