Why and How Capital Projects Fail
What is a capital project? Capital project investments are by their nature large and inherently risky. They involve change involving the introduction of new technology, expansion of operations, implementation of regulatory requirements and replacement of critical infrastructure.
An organization’s future strategy and competitiveness depends on project success and thorough execution. However, they too often they go wrong, which is further explained in our article, “Why Good Capital Projects Fail“. Understanding the ways in which capital projects fail and the impact of these failures can help you to avoid future failures.
6 Examples of How Capital Projects Fail
According to KPMG “Projects that miss their performance metrics, fall short of certain objectives, or fail completely, are rarely caused by ’force majeure’ random events, or ‘black swans.’ The cause is more likely to be controllable factors”.
The number one reason of how capital projects fail is when they fail to deliver organizational objectives. Project goals and investment requirements are normally defined in a business case that is approved by executive management. When project outcomes vary from these plans they fail as outlined below:
1) Projects Delayed
Probably the most frequent way that projects fail is that timelines slip. Sponsors tend to be over-ambitious. Suppliers tend to be too naïve. Environments shift. Our recent history of natural disaster, pandemic and war bring this into full focus.
Supply chains are disrupted everywhere and human resource movements are severely constrained. Despite best efforts, project durations extend. Whilst overall investment may not be impacted, current operating risk exposures persist, and anticipated benefits are deferred.
2) Project Over Budget
Many projects exceed their initial budget expectations and require supplementary funding. Estimates are too often based on best-case outcomes with insufficient risk assessment or contingency provided. Unanticipated complexities emerge. Contractual fine print is overlooked. Foreign exchange rates vary. Internal resource costs are underestimated. Mitigating actions are implemented too late.
3) Project Abandoned
Some projects proceed within time and cost constraints, but are terminated early or delivered assets are never commissioned. This is because higher priority projects take precedence. Because of lack of adoption by intended beneficiaries. Or simply due to misalignment with strategic priorities. This is a grave case of avoidable waste.
4) Projects with Over-Promised Benefits
This is when the asset is delivered but fails to produce the anticipated business benefits. Revenue growth does not transpire. Cost saving are not realized. Risks eventuate regardless. Too often promises are not actually measured and this failure is not even acknowledged. This risk will perpetuate if business case assertions are not formally validated.
5) Project Opportunity Identification
Frequently, an assessment of project outcomes will assess that the deliverable could have been achieved more efficiently. This represents an opportunity cost. The better approach would have allowed resources to have been more productively employed elsewhere.
Sometimes only the direct project team will acknowledge this conclusion. But for the organization to prosper, sub-optimal delivery of project initiatives should be considered a type of failure, and learnings should be gained to avoid repeated occurrences.
6) Projects That Aren’t Started
A project that never starts can also be a failure. Time and money may have been incurred in the development of the business case. More critically, underlying problems and opportunities may not have been addressed.
The initiative may have been essential, but due to poor project definition or selection, the project was never undertaken. This too represents an opportunity cost, which just like cost over-runs should be considered a project failure. It is important that an organization identifies these ‘lost-opportunities’ and identifies why they occurred.
4 Key Impacts of Capital Project Failure
Capital investments projects consume significant corporate resources and the impact of failure can be dire. IQX has identified the following 4 key impacts of capital project failure:
1) Strategy not Realized
The major impact of failed capital projects is that critical organizational strategies are not realized. Strategies adjust to underlying business conditions and adjust to understandings of how capital projects fail. Sometimes cost mitigation and consolidation strategies are the priority. At other times, competitive innovation and growth are more important.
Enterprise strategies should be devolved to all supporting areas. What is essential is that an optimal portfolio of projects should be undertaken by each area to deliver organizational goals at the lowest cost and risk. All capital project failures therefore prejudice the realization of both area and higher-level strategic objectives.
2) Excessive Resources Consumed
Owners entrust executives to steward the resources of the organization and deliver its objectives for all stakeholders. Any over-investment of time or money is an abrogation of these responsibilities.
3) Catastrophic Loss
Due to the large scale of capital projects, these have the potential to cause catastrophic loss. This can happen through both action or inaction. Making a poor investment decision may trigger immediate and obvious costs.
Failure to undertake a necessary project can similarly incur significant impacts when inherent risks materialize. Doing nothing is not an option. It is this imperative to do all the right things, and to do them all well. That is the over-riding challenge of the capital expenditure process.
Someone is always responsible. For large scale capital projects this is generally the chief executive officer, and their direct C-level reports. Accountability cannot be avoided. That is why all area managers, and senior executives require confidence in information they are being presented so that they can make wise, timely and justifiable decisions. Their careers depend on it.
How to Mitigate Capital Project Failure
High value, extended duration, capital project initiatives frequently fail. They consume too many resources, deliver too little value or don’t sufficiently mitigate risk. Recognizing the risk of project failure through experience is an expensive way to learn, especially for project managers.
IQX CAPEX explicitly addresses the risk of project failure by improving project definition, project selection, project execution, and project validation.
The business case for implementing a seamless and integrated solution for this critical business process is often self-evident from a simple evaluation of recent project performance. Through these effective methods, overall project costs and risks will be optimal for any business case.