Was Santa Good to Your Site? If Not, Here Are Three Tips for the Business and Site Management to Protect Your Site’s Capital in 2015
I think it’s fair to say that St. Nick probably did not, in fact, visit your production site last December. With the rapid decline in oil prices and metal/mineral prices remaining low, companies across various industrial sectors are cutting back on their capital expenditure budgets. Individual facilities and sites are receiving less capital for 2015 than they were allocated for 2014, and a number of clients say project portfolio decisions are being delayed, hiring requests are being denied, and in some cases, headcount is being cut. In other words, you may be feeling like your site got a lump of coal for Christmas … instead of the plentiful capital needed to produce coal, oil, or other products!
This can create more than the usual tension between the businesses looking to conserve capital and the facilities hungry for capital to maintain and upgrade their assets. So what can you do to maximize your chances of maintaining a successful site capital program in 2015? It’s too late for Santa, but IPA has a few key pointers for this situation:
1) Use historical data on capital allocation to guide capital cutbacks
Most businesses have a way to measure capital allocation to their facilities—often as a percent of gross book value or annual depreciation or relative to a measure of production. Recently, IPA studied the capital allocation process and metrics across a number of industrial facilities. Our goal was to answer two questions: what measure of capital allocation is “the best”? and what is the right level or range to target for my sites? We also looked at historical trends over the past 10 years. For some commodities, capital allocation has trended above annual depreciation for the past few years, suggesting those sites can endure a significant cutback this year and perhaps in the next few years. While that may not be the answer sites are looking for, comparative industry data is the way to best ensure your sites are neither under- nor over-capitalized and to push back against knee-jerk reactions.
2) Make sure your sites spend the money they get!
Even in down years, sites frequently fail to actually spend all of the capital they were allocated. Many sites underspend their total capital allocation by 15 percent or more. In a year when capital is tight and projects are being cut left and right, that is simply not acceptable! Key Best Practices around portfolio management and scheduling help top performing sites spend their capital as planned and avoid an end-of-the-year crunch. If you’re not already using a robust system to rank and schedule your projects, now is the time to begin.
3) Know your resources’ worth
It’s always tempting to cut headcount when prices dip and the market outlook is uncertain, but most sites are understaffed as it is. Further, keeping a resource in-house rather than outsourcing it or eliminating it entirely can often pay for itself multiple times over. As an example, the all-in salary for a project control specialist may be $200,000. However, IPA data show that sites with an in-house control specialist are, on average, at least several points more cost effective than sites that lack this resource. In other words, even if you’re a relatively small site with a $20 million capital budget, having a control specialist on site can save you $600,000 or much more, year after year. This kind of value proposition can help sites protect and justify their core project resources this year.