Capital project completion is the formal process of bringing a capital project to its conclusion. It involves finalizing all project activities, ensuring that project goals and objectives have been met, and making necessary arrangements for the project’s transition or handover.
A significant amount of time and money is invested in the delivery of large capital projects. It is at the end of these projects where the rubber truly hits the road, and the key question is finally resolved: was it all worth it?
The stark reality is that most capital projects fail to some degree. Costs or delivery schedules, and often both, are regularly exceeded. Even worse – some projects are completely abandoned prior to successful conclusion. With the benefit of hindsight, alternative courses of action would have been preferable. Business Cases promises are never quite realized. Or sponsors regret that they had not done project B instead. And strategic goals slide out yet another year.
This is why capital project completion and review is so uncomfortable. It feels a bit like walking through the battlefield, after the battle is done. And stabbing the wounded.
Nevertheless, in the pursuit of continuous improvement, to try and mitigate the risk of future failure, and to achieve our strategic goals sooner, this critical process must be undertaken. It is only through inspection and adaptation of personnel, processes, and tools that organizations can expect an improved result next time round.
In this article we examine the key activities to be performed as part of the capital project completion and review process.
Technical Capital Project Completion
The first step of capital project completion is to confirm that the deliverables have been achieved. Every project must have a defined scope of work and acceptance criteria. This is the most obvious step in capital project completion, but often the most controversial. Vendors will proclaim the works complete. Sponsors will typically have wanted slightly more. Independent experts may be consulted. And ultimately Project Managers will deploy all their negotiation skills to find common ground.
There are no simple solutions to expedite capital project completion for the next project. The obvious recommendation is a more definitive scope definition. Unfortunately, ever-more detailed specifications can create undue rigidity and cost blow-outs as imperfect designs can trigger high volumes of contract variations. Sometimes, more agile methodologies where funding and durations are fixed, with a dynamic prioritization of scope, can produce optimal outcomes.
The best guidance is that the project approach and methodology should be tailored to the needs of the project, so that the definition of ‘done’ can be fairly agreed by all parties. And where the organization has limited experience with a particular class of project, the risk assessment process should trigger a suitable provision of cost and schedule contingency to achieve the desired outcome.
Hand-Over to Operations
Completed capital projects must be effectively transitioned to operational teams. This involves a formalized sign-off and acceptance of the project deliverables. Projects should not enter productive usage without this sign-off to avoid ongoing disputes. Techniques that can be employed to facilitate sign-off include:
- The identification of key stakeholders and their roles should be clearly specified in the project definition and charter.
- Stakeholder preparation – from the very beginning of the project, key stakeholders should be encouraged to acknowledge and prepare for their role in acceptance of deliverables.
- Acceptance criteria – these should be defined as a suite of objectively verifiable outcomes under specified operating conditions.
- Conditional acceptance – projects are seldom one hundred percent complete, and acceptance may be provided in phases or subject to the completion of specified exceptions.
- Warranty periods – where delivery defects may be latent and not directly or economically verified, provision of an extended warranty period may give stakeholders the necessary confidence to take possession of the project deliverables.
- Digital workflow – because of distributed teams and auditability requirements, obtain electronic signatures through a robust automated workflow routing system.
Receipt all Goods and Services
All projects involve the procurement of goods and services from internal or external providers.
Internally, stock may be transferred from stores, or assets redeployed from other areas. Internal departments may provide project management, financial control, and technical services that are charged through internal timesheet approvals.
External goods and services need to be receipted for the associated costs to reflect in the project accounts. Reconciliation of planned and actual costs can help identify any outstanding cost items.
Acceptance of project charges is best done by those closest to the action – by the project managers themselves, or their stream leads and supervisors. Your project’s system should be deeply integrated with procurement and offer an intuitive user-experience for the efficient and timely recording of these costs so they can reflect on project ledgers in real-time for effective cost monitoring.
Approve and Resolve any Invoice Variances
Capital projects are often kept open awaiting the receipt and processing of final supplier invoices which may impact the final project costing. To expedite capital project cost finalization and closure, the following techniques are recommended:
- Maintain different project statuses to distinguish between Technical Completion, which should prevent new purchase commitments being raised, and Commercial Closure, which should prevent any further charges being made to the project ledger.
- Enable project managers to easily track and make decisions on disputed invoices. Any decision by project managers to accept quantity or rate variances, and thereby incur additional charges to the project ledger, should be subject to procurement approval.
Close Purchase Orders
Once a capital project is technically completed no further goods or services should be accepted, and once a project is commercially closed, no invoices should be accepted.
On project completion, procurement officers should be included in the workflow to ensure that any open un-receipted or un-invoiced items are closed out, and suppliers notified accordingly.
Clear Project Forecasts
Expenditure forecasts play a critical role in the monitoring and control of capital projects. On capital project completion, it should be ensured that these forecasts are reviewed and ultimately cleared out once the project is commercially closed (and no further charges accepted).
It is best practice to conduct a formal vendor performance review with the procurement team on major capital project completion. Where negative assessments are made regarding vendor delivery in full, on-time, and to required quality (DIFOTQ) performance, vendor follow-up actions should be initiated. These follow-up actions would include a vendor non-conformance report that may require them to produce evidence of remedial actions to mitigate against future sub-optimal performance.
Transfers and Adjustments
An inspection of project costing ledgers may lead to the identification of misallocated items that are required to be transferred internally between various work breakdown structure elements or even between projects.
Project accountants should be able to initiate project cost accruals and adjustments easily and have an automated workflow that includes approval by both sending and receiving project managers prior to generating the required entries.
Budget Reconciliation on Capital Project Completion
Capital Projects are typically allocated cost budgets. These budgets specify an overall and annual expenditure limit. Given that all organizations are subject to some degree of capital funding constraint, the effective allocation of budget to various projects is tightly controlled and highly valued.
Project managers cling to their budget allocations and are loath to release them. However, capital funding ‘locked-up’ in completed projects are idle funds that deliver no return for the organization.
It is important, therefore, that any surplus budget allocated to projects is ‘returned’ when no longer reasonably required, and certainly on project completion. This available budget can then be redistributed to other projects that need further supplementary budget allocations.
Where multiple projects are conducted under a single program or area of responsibility, it may be appropriate to directly transfer budget capacity between those projects. It may also be necessary to transfer budget capacity between years, as project delivery schedules change.
Any budget transfers should be clearly identified, justified and subject to appropriate management approval.
If budgets are returned to the budget pool a budget redistribution process must be enabled so that the organization can continuously optimize the allocation of scarce budget funding capacity amongst the most valuable project alternatives.
The goal of capital projects is to create new capital assets for an organization. These capital assets may be physical such as new manufacturing plants, or intangible such as software.
On capital project completion, the delivered assets should be fully described, assigned to responsibility areas, and updated in the Fixed Asset register.
Several stakeholders are involved in the set-up of Fixed Assets. Financial and tax accountants are primarily interested in asset classification and useful lives which directly impact depreciation schedules and taxation. Maintenance managers will want to ensure that serviceable equipment is identified, and that any required essential spare parts are acquired. Asset Accounting teams will want to ensure the location, tagging and description of assets will enable future identification and tracking.
Consequently, fixed asset creation should be integrated into the capital project completion process and include workflow routing to these participants to ensure asset master is accurate from inception.
In addition to the creation of the asset master records, on capital project completion it is necessary to allocate the total project cost amongst the many fixed assets that may be delivered. Ideally, projects are structured to facilitate the collection of project costs in work breakdown structure elements that correspond to discrete assets. But the structure of projects should not be constrained by accounting treatments, and in practice it will frequently be necessary to determine a valuation split between multiple fixed assets that are delivered.
The distribution of project costs to fixed assets should be easy for project accountants to specify, either by percentages, or by absolute values. These settlement rules should be subject to approval by key stakeholders, and automatically update the project system once approved.
Post Implementation Review on Capital Project Completion
Cost Performance Review
On capital project completion, a detailed analysis should be conducted of planned and budgeted versus actual costs and schedules.
A percentage-based analysis is typically conducted, and color-coded performance metrics produced for presentation to executive management. These metrics will include cost, schedule, and quality grading. This cost-performance assessment is commonly considered when evaluating project managers, team members and performance incentives.
Benefits Realization Assessment
A critical step in the capital project completion process is to assess the achievement of business benefits promised in the original business case. Sometimes this can be done contemporaneously with capital project completion, for example when the benefit is replacement of an existing asset. For growth and savings initiatives, however, benefits realization evaluation may need to be undertaken some years after capital project completion. For example, the cost savings, or revenue growth, may take some to time to eventuate.
The capital project completion process should identify the need and timing for a benefits realization review and keep track of the assessment results.
The goal of the cost performance review and benefits realization assessment is primarily to learn. And to do better in the future. When teams deeply evaluate the root cause of any adverse findings, it invariably transpires that the greatest opportunity to influence project outcomes is not at the end, in the capital project completion stage. But at the very beginning – in the identification, definition, evaluation, and ranking of candidate projects. Given the competition for scarce budget funding, there is an inherent moral hazard to underestimate costs, and overestimate anticipated benefits. The only question is how, specifically, can these up-front processes be improved?
For many organizations it comes down to single point estimations, without an appropriate factoring-in of variability about this best-case outcome. Only once estimations are range based, and scenario-based simulations performed, can a more realistic projection of project and portfolio outcomes be produced. To enable consistent and comparable project financial analyses requires a standardized method of capturing and processing this data. It requires utilization of common global assumptions such as exchange rates, market growth and discount rates. And low-risk capital project delivery requires agility. To terminate or mitigate failing projects sooner. And to re-deploy capital funding quickly to where it matters most.
Capital project completion implies that an important milestone has been reached. The project is done. For better or worse. But for sure, the team have tried their best, and this is a time for recognition and celebration. Ceremonies help build organizational culture, teamwork, mutual respect, and incentives for the future. So yes, whilst any bad news must be confronted, and risk mitigation strategies actioned for future success, project completion should always be celebrated, positives highlighted, and all team members recognized for their efforts.
Capital Project Completion: A Complex and Collaborative Process
Capital project completion is a significant milestone, marked by a unique blend of stress and celebration. It’s a moment of reckoning when all the promises made, plans devised, and purchases executed culminate in a final product. At this juncture, a critical question looms: Was it worth it?
To ensure that your capital investments truly justify their existence, a holistic perspective is indispensable. It necessitates the seamless optimization and enhancement of the entire capital expenditure management process, spanning from the initial spark of an idea to the moment it transforms into a fully operative asset. If your current capital project completion process is fraught with challenges and pain points, it may be the opportune time to consider embarking on a digital transformation journey to overhaul your end-to-end Capex process. This transformation holds the promise of turning the perennially nagging “was it worth it?” question into a resounding “Yes!”
IQX CAPEX is your trusted ally in this endeavour. With our expertise and innovative solutions, we can assist you in making capital project completion a seamless, repeatable process. Imagine a future where your capital projects not only meet but consistently exceed expectations, where you can confidently assert the value they bring to your organization. We are here to make that vision a reality.
Don’t hesitate to contact us with any questions or to discuss how we can collaborate on your journey towards more successful capital project completion. Together, we can usher in a new era of efficiency, transparency, and confidence in your capital investments.