Monitoring capital projects and addressing signs of trouble

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1 /01 / Leadership Series 6 PROJECT ADVISORY Monitoring capital projects and addressing signs of trouble Leadership Series 6 kpmg.com/nz About the Leadership Series KPMG s Leadership Series is targeted towards owners of major capital programmes, but its content is applicable to all entities or stakeholders involved with major projects. The intent of the Project Leadership Series is to describe a framework for managing and controlling large capital projects based on the experience of our project professionals. Together with our simplified framework, we offer a sound approach to answer the questions most frequently asked by project owners. Introduction There are many examples of construction projects exceeding their budgets like the Sydney Opera House, where the actual cost of completion was 15 times higher than the original budget1. A story such as this, coupled with the fact that capital projects represent some of the most costly and risky endeavours a company will undertake, might make business owners hesitant to invest in large capital projects. 1. Flyvbjerg, Bent ( ) Policy and Planning for Large Infrastructure Projects: Problems, causes, cures (Report) While numerous factors contributed to the massive cost overrun on the Sydney Opera House, one of the toot causes was the absence of an integrated framework of process and controls for monitoring the project. Fortunately there are tools and techniques that can be used by your project management teams to reduce the risks associated with capital projects. This white paper will first address some of the key project management control areas that will aid in the success of your capital project. Next, we ll discuss effective monitoring and how to identify red flags that may indicate potential risks. Finally, we ll discuss some steps you can take if you find that your project is heading in the wrong direction where the schedule is slipping, costs are rapidly increasing and project performance is declining.

2 /02 Project Management Process 2: Cost management Budgeting The process for developing a budget should be formalised, so the budget baseline will be robust and appropriate for the needs of the project. A formal process also promotes consistency across projects and provides a framework for monitoring. 1. Using a project management controls framework Most industry leading practices recognise that the selection and use of a project management controls framework helps to ensure project success and avoid major project issues or failure. The purpose of a project management controls framework is to put a system of key controls in place alongside an effective reporting system. Consistent use of a project management control framework allows key performance indicators to be monitored frequently and unfavourable trends to be addressed early on. KPMG s Project Controls Framework (discussed in our white paper KPMG s Project Leadership Series: Governance and Project Controls) is organised into five main project management processes. Within each of the main process categories are key project management controls, which, if properly implemented, can improve your capital project success. A brief summary of our Project Controls Framework and key controls follows. Project Management Process 1: Programme strategy, organisation and administration Project strategy It is important to develop a delivery strategy for each major capital project and to get concurrence of key personnel and stakeholders. No two projects are identical, and similarly the strategies used to deliver each project should be unique. Projects should be subject to a formal authorisation and approval process prior to entering into contract and committing company funds. Policies and procedures There should be a set of formal policies and procedures for all core and support process areas, and these should be regularly reviewed and updated. Personnel should have real time access to the most current version of these documents and should receive training to promote compliance. Roles and responsibilities In the same way that organisations define the roles and responsibilities of their employees for standard business operations, each capital project should have identified resources with specifically defined roles and responsibilities. Often, the simple identification of owner, consultant and contractor personnel along with their areas of responsibility will greatly enhance communication among project team members. tip 01: Construction projects can fail for many reasons. Poor risk management, scope creep, approval delays, inexperienced project team or support personnel, ineffective controls, and improper contract administration can all contribute to project failures. Another contributing factor is ineffective project monitoring systems. Implementing an effective project monitoring system is one of the most difficult project management challenges, as project reporting requires coordinated information and integration form all project phases and construction activities, ranging from early strategy and planning to project closeout and commissioning. Given the size, scale and complexity Payment processing and administration It is critical to establish a formal payment review and approval process to control costs on a capital project. This process should be documented in the project specific [policies and procedures. Project Management Process 3: Procurement management Sourcing To form strong business relationships with reputable firms, the solicitation process must be formalised. This formalised process promotes consistency among projects and will establish a reputation of fairness for your company. Contracting Contracts are legally binding agreements, so it is essential that the language of these contracts be carefully considered and standard contract templates developed for consistent use across all capital projects. Involve your legal department or external counsel in this process. of many projects, organisations cannot afford to prepare and produce project reports in a reactive manner. Governing boards, shareholders, bondholders, and regulators are establishing high standards for project performance in order to help ensure that projects are delivered on time, within budget and to the expectations established by the project stakeholders or rate payers. To accomplish these goals, construction projects should implement leading project monitoring systems tailored to meet the needs of project stakeholders, regulatory requirements, and provide an accurate historical record of project information for future projects as well as operations and maintenance purposes.

3 /03 Project Management Process 4: Project controls and risk management Change management Capital projects are constantly changing, and in order to effectively manage these changes, it is important to develop a formal process including standard documentation and review and approval procedures. Risk management As previously mentioned, capital projects are risky endeavours, so it is important to have a process in place for addressing risks these risks. Risk management involved assessing risks prior to engaging in a project and continuously developing and reacting to those risks throughout the project lifecycle. 3. Project management reporting To monitor a project at a big-picture level, management and key stakeholders must receive status reports that include agreed upon information, in an agreed-upon format, and at a frequency that slows for real-time monitoring and reaction to potential issues. The most common project failures result from schedule slippage and cost growth. Examples of trend monitoring that management may be interested in include: Actual percent complete (cost basis) compared to schedule percent complete document any differences. Original budget compared to adjusted budget budget changes and transfers should be appropriately tracked and approved by project management. Pending change orders and commitments that may be approved, but which are not yet priced or included in the project budget. Other cost risks that are not included in the project budget. Cost to Complete (CTC) based on established cost estimating techniques (this should not just be a subtraction of original budget less costs to date). Total cost forecast variance from adjusted budget. Project Management Process 5: Schedule management Schedule development standards Developing formal schedule development standards results in project schedules that include the necessary components for effective monitoring. It also promotes comparability among projects. Schedule change management Schedule change management is in a category of its own due to the frequency with which schedule adjustments are made. It is not uncommon for the schedule to change daily based on factors such as weather, materials delivery, staff availability, actual versus budgeted progress, etc. tip 02: Preparing summary cost reports is one of the most challenging project reporting activities for most large projects due to the focus on tracking and reporting to accounting requirements. Accounting requirements can often make it more difficult for the project team to reconcile and summarise data from several sources and present accurate project financial information in a well organised and consistent manner. Payment information and procurement/contract information often reside in separate systems, and budget information, if not approved at a detailed level. May require redistribution over many cost categories. Key components of an effective reporting system for projects include: Transparency and accuracy Ability to drill down by layer Limited redundant information in different systems Limited number of manual adjustments Limited large variances between original submission and actuals. For projects that will be subject to a prudence review, it is important that project cost reporting is timely, and accurate, and provides the level of detail required to support any request for additional costs or justify any cost overruns. 2. effective techniques for monitoring capital projects Entities with a robust project management framework can still run into trouble if they do not apply thorough monitoring techniques. Monitoring techniques set up the feedback loops to assess whether control processes are operating effectively, and if they are not, monitoring techniques help to reset control processes tailored to the specific project environment. Monitoring techniques also ensure that unfavourable project trends are identified and mitigated by the project management team. Based on our experience with troubled projects, the following monitoring techniques may help you to keep your project on the right track.

4 /04 4. Assessment of roles and responsibilities As the project progresses, observe and gather feedback about the project management team to help ensure that roles and responsibilities that were initially developed remain effective. Continually assess whether the project team members assigned to each role demonstrate the appropriate competencies both internally, within the owners organisation, and externally, among contractor and consultant personnel. 7. Project reviews and compliance auditing Perform periodic project reviews to monitor risk and to assess compliance with carefully developed project policies and procedures. These reviews can be performed internally or by a third party. The project review methodology should be standardised to provide for comparability across multiple reviews. Issues identified should be tracked and reported on a frequent and ongoing basis and verified for compliance during subsequent project reviews. For compliance auditing, be sceptical, especially in your invoice review process. For example, do not release retention amounts prior to a contractor finishing its work. Also, during the invoicing process, be sure to obtain and track unconditional lien releases to reduce exposure to costly and time-consuming claims. 8. red flags and potential project issues What do you do if you have great tools for monitoring capital projects, but you are unsure about how to interpret the results? How do you know if project trends are favourable or unfavourable? Capital projects generate huge amounts of data. Here are some red flags and potential issues common to the construction industry: Project reports that do not change significantly over time may indicate that their content is not being updated regularly to represent true project status. Project reports that summarise overall progress at a very high level with little or no supporting documentation of the percentage of completion or the cost forecast may indicate a lack of competence or unreasonable optimism on the part of the contractor. Project estimates or changes without a detailed breakdown of costs including labour, equipment, materials and subcontractors may indicate poorly developed estimates. Lack of appropriate reviews and approvals or signatures on contracts and change orders may indicate ineffective controls or intentional circumvention. Inability to produce supporting documents in a timely manner may indicate that project management team members are skipping steps in your defined process. Schedule changes presented without documentation of potential cost impacts may indicate lack of integrated cost and schedule reporting systems. Risk items that do not indicate responsible parties, status, mitigation plans, etc., may indicate poor monitoring and risk response. 5. Project cost reporting In addition to higher level cost reporting in a project status report, be sure to include standardised reporting of detailed project costs. Key elements of such reporting include original budget, budget transfers, approved change order, current budget, commitments, pending change orders, payments to date and forecast. 6. contract administration and compliance Once formal contracting processes and contracts are in place, monitor activities performed under the contracts for compliance with contract terms, and formally track all contract changes. Key contracting practices also include a process to select appropriately qualified contractors and consultant. tip 03: Dashboard reports and risk reports can be effective ways to help identify warning signs for projects. A good project dashboard includes the important project metrics presented on a single page. If a project dashboard takes more than a few minutes to comprehend or requires a lot of explanation and other supporting information, it has not served its purpose to provide quick, meaningful, and actionable information to management and other key stakeholders. Dashboard reports are especially useful for large programmes with repeatable projects. Status of permits, right of ways, transmission tower construction, etc., are all easily communicated via simple dashboard reports. Formalised risk reporting has been around for a while, but it has recently emerged as a standard and valuable tool in identifying, analysing, tracking and responding to project risks for major construction projects. Risk reporting may take the form of a simple risk register updated on a routine basis or a combination of risk dashboards, risk analysis, and meeting minutes discussing risk trends and other important risk management information. As the success of projects becomes more and more focussed on the ability to effectively management and mitigate risk, especially environmental and regulatory risks, the greater the importance of an effective risk reporting function.

5 /05 9. reacting to a troubled project Despite best efforts, sometime a capital project fails to meet its performance expectations. The schedule may continue to slip, costs may be increasing rapidly, and perhaps, contractor change order requests and potential claims are piling up. If this happens, here are some steps you can take to lessen the risks and costs of a troubles project: Increase the frequency of project status reporting engage stakeholders more often. Get out of your office and into the field observe contractors and subs as they perform their procedures to assure yourself that the project status is what they are reporting. Consult legal counsel to make sure you have a clear understanding of the remedies available in the contract exercise and remedies that are beneficial. Assess project documentation practices and address any deficiencies. Consider hiring a third-party subject matter professional to perform a project assessment. Conclusion The costs and risks associated with major capital projects are here to stay. What you can do is to avoid excessive risks and failed projects by using a consistent project management framework paired with effective monitoring techniques. Using the tips in this white paper, your business can make well-informed proactive decisions that will help to lead your project down the road to success. If your project experiences some unexpected challenged, don t throw in the towel. By reacting expeditiously to a troubles project, you may help lessen the damage and get your project back on track.

6 /06 About KPMG KPMG s services are objective, professional approaches to managing the many risks associated with major change: risks that involve complexity, technology, governance, selection and management of vendors and partners, implementation of solutions and acceptance of change throughout the organisation. KPMG applies leading concepts and practices, supported by: Experienced practitioners Recognised best practices Effective tools and templates International standards Built-in knowledge transfer Services can assist organisations to generate significant cost savings by minimising poor selection decisions, costly overruns, misalignment with business needs, poor quality deliverables and failed projects. Our project advisory services include Independent Quality Assurance (IQA) Is your project or programme on track? Are the key risks and issues being effectively managed and addressed? Independent Quality Assurance is KPMG s approach to providing objective, practical and open feedback to senior executives, independently assessing project status, risks and issues. Advice is provided by experienced staff who are not part of the delivery team. Portfolio, Programme and Project Management (P3M) Practices P3M provides services for the purpose of designing or evaluating portfolio, programme, or project management practices. The objective is to assist in implementing or improving P3M practices to reduce project costs, increase project success and create an organisational P3M support environment which is valued by internal and external stakeholders alike. Large Project and Programme Management Assistance This cornerstone service of KPMG s Advisory practice is designed to address the full lifecycle of a project or programme, providing an integrated approach to managing large initiatives the result: significant efficiencies and enhanced outcomes. The methodology incorporates concepts from well-known risk, benefits, project and quality management disciplines to help companies achieve the results they expect during every phase of a large project or programme. Project Risk Assessment and Monitoring These services provide a highly focused, activity-based approach to project risk management. They provide management with an objective and independent assessment of the risks associated with a business initiative, programme or project, and evaluate the effectiveness of planned or implemented controls to mitigate the risks. Benefits Management and Realisation Advisory KPMG professionals help you identify the measurable business changes that you will to see at the successful completion of your project and to tie these into an effective Benefits Management and Realisation strategy which can be referenced in your Business Case. Even for projects where outcomes are enabling or intangible, our Project Advisory team will be able to assist with the identification of proxy indicators and benefit relationships to support the approval of your Business Case and its successful delivery. Portfolio Management Effective portfolio management helps large organisations make sound decisions by prioritising the deployment of scarce resources to change initiatives and maximising their value to help achieve the organisation s strategy. Organisations operate in increasingly dynamic environments, which often make it a struggle to satisfy fluid business requirements. KPMG s Portfolio Management (PfM) Advisory and Assistance services help organisations to develop appropriate processes and capabilities to achieve this aim. We provide practical guidance for conducting capability development, maturity assessments and performance reviews. Our methodology provides a flexible, comprehensive approach that can help our clients achieve their goals. Programme Management Office Assistance Programme Management Office Assistance is intended to help our clients develop the processes to support a Programme Management Office. We assist with the development of a client s programme office processes and facilitate communication across client leadership to help make sure that enterprise programme initiatives are aligned with the organisation s business strategies. The focus of the PMO is to increase project visibility across client leadership in order to help achieve strategic programme performance. Our practitioners know that successful projects are the result of clear vision, careful planning, and meticulous execution. Bottom line: services drive speed and effectiveness of change within your organisation by reducing costs and increasing success.

7 Leadership Series Please look for important topics covered by our Leadership Series in the coming months: Project development and delivery strategy. Contact us Gina Barlow Director T: (04) E: Chris Dew Director T: (09) E: Perry Woolley Director T: (09) E: Harriet Dempsey Associate Director T: (04) E: kpmg.com/nz 2013 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in New Zealand. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 3418

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