Capital Project Governance Setting up for Success

Transcription

1 Capital Project Governance Setting up for Success November 27, 2013

2 Today s presenter Janet Rieksts-Alderman, CMA, CCSA Canada (Toronto) Certified Management Accountant (CMA), CCSA, and Institute of Internal Auditors Working with Boards and Management to enhance governance, risk and control practices over their Capital Projects Led risk and compliance engagements for her mining clients operating in Canada, UK, US, Mexico, Central America, South America, Asia and Australia

3 Our global team Lars Tvede-Jensen Sweden Martin Blokland Netherlands Julian Smith CEE & Russia Tim Nicolle Russia Tony Poulter UK Hansjorg Arnold Germany Michel Grillot Canada Peter Raymond US Francisco Ibanez Mexico Peter Vickers France Patricio de Antonio Lorenzo Spain Guido Sirolli Italy Charles Lloyd Middle East Yumiko Noda Japan Hongbin Cong China Andrew Chan SEAPAN (inc. Malaysia) Mark Rathbone Singapore Carlos Biedermann Brazil Sotiris Pagdadis India Brian Gillespie Australia Mark Ally South Africa Vishal Agarwal Central Africa 3

4 Agenda Introductions 1. What s at stake 2. Owner s role in executing successful projects 3. Case Study Managing Project Risk 4. Governance 5. Additional information and closing comments

5 What s at stake?

6 Overview of Capital Projects Definition A capital project is any undertaking which requires the use of notable amounts of capital, both financial and labour, to undertake and complete. Capital projects are often defined by their large scale and large cost relative to other investments requiring less planning and resources. Typical stages in a capital project in Mining (may vary from company to company; overlap between stages): Scoping Feasibility & planning Construction Operations Closure Scoping Study Pre Feasibility Study Feasibility Study Contract Strategy Project Controls Schedule and Cost Management Operational readiness Extraction and Processing Asset Maintenance Support Services Shut down Decommissioning Reclamation Post-Closure Capital Project November 26,

7 Typical cost and revenue profile Capital expenditures can peak during construction, therefore, right decisions need to be made early on to ensure the right results are achieved in Mine Operations. Detailed Design Plan Design Develop Test Hand-over Operate & maintain Peak Spending Capital Expenditures Revenue November 26,

8 Capital projects are integral to strategy 8

9 Yet, more than 75% experience budget overruns 9

10 If mismanaged, capital projects erode share value 10

11 Across industries, loss in share value increases steadily over time 11

12 Smaller companies suffer larger losses 12

13 Capital-intensive industries record the largest share price erosion 13

14 Capital project represent substantial risk 37% Thirty-seven percent of directors believe there is no clear allocation of specific responsibilities for overseeing major risks among the board and its committees. 14

15 Projects fail primarily due to managerial aspects. Design errors and omissions leading to scope growth / re-work Poor project controls (cost & schedule) Ineffective Project governance, management & oversight Weak / ambiguous contract terms, misaligned incentives Unanticipated site conditions Technical problems 4% Suppliers failures 8 % 4% Inappropriate/inadequate resources Inadequate Project Environment 10% 11% Directly related to technical aspects Technical aspects Insufficient planning / poor estimating Cost overruns / schedule delays Imposed cash constraints / delayed payment Inadequate Planning/ Monitoring Lack of clear objectives 15% 20% 9 2 % Directly related to managerial aspects Inadequate communication / slow decision making Late design / poor project definition Skilled labor availability Inexperienced management team Lack of management (organizational) 36% Managerial aspects Poor risk identification, management and response strategy 15

16 Owner s role in executing successful projects

17 A typical project organization is set up as follows: Board of Directors Corporate Management Team Project Management Team EPC(M) Subcontractor #1 Subcontractor #2 Subcontractor #3 November 26,

18 Capital Project oversight framework The framework is a six-step process that: Provides a structured approach for management and boards to help with their oversight obligations, Offers flexibility for industry specific needs or special circumstances, Identifies key intervention points on complex projects to assess risk profile, Includes leading oversight practices to facilitate discussions with the CFO, project sponsors, management, or external stakeholders, and Identifies issues not currently on management s or the board s radar. 18

19 1. Conduct a comprehensive assessment Determine how critical capital projects are to the company and the current state of its delivery capability Specifically assess: - The importance of capital project to the business model; - Historic size and budgeted appropriations for such projects; - Track record in terms of cost, schedule, and operational performance of previous capital projects; and - The diversity of the company s project portfolio and experience - Organizational risk appetite contract strategy, delivery options and required growth Sample Questions to ask project sponsors Are we ready? Assess maturity/readiness to advance to each stage. Are we aligned? Are strategic goals aligned with tactical capabilities 19

20 2. Get the right team to build the right approach Agree on the board s capital project oversight approach, including measures such as: Bringing capital project experience onto the board and the owner s team Dedicate one or more seats to someone with capital project delivery background such as a former construction company executive, a former project sponsor, or a director that was previously responsible for oversight of major capital project or reserve committee. Identify deficiencies within your owner s team and add team members if required. Use outside expertise When project delivery capability as not a core competency seek the expertise of external consultants. Meet Optimism Bias with Professional Skepticism Sample Question to ask project sponsors Does management have appropriate controls in place to provide timely and accurate status to the board - with verification? 20

21 3. Prioritize Identify the level of management and board involvement in key activities: Capital investment planning (CIP); Project development and approval; Alignment of risk and control environment; Contract strategy and selection criteria; Project systems and reporting; and Fraud prevention and detection Sample Question to ask project sponsors Is the project execution team regularly evaluating how the project affects the corporate risk profile and reporting accordingly? 21

22 4. Ensure project is aligned to company strategy Align capital project activities with intervention and oversight by: Integrate mega-project lifecycle into the management and board s ongoing review of the company s strategy The more critical capital projects are, the deeper management/board should probe capital investment planning and ongoing projects to establish accountability and the execution of an effective and consistent strategy When strategies change, it may be necessary to alter that capital investment plan and even suspend or cancel ongoing projects to efficiently allocate resources among the company s often competing priorities Sample Question to ask project sponsors Does management have appropriate controls in place to provide timely and accurate status to the board - with verification? 22

23 5. Actively monitor and manage risk throughout project. Hard-Wire capital project delivery into risk management oversight by: Understanding external risk drivers stemming from market, labor, political, regulatory, and community conditions; Understanding internal risk drivers including optimism bias, execution readiness and capability, completeness of design, efficacy of reporting; Reviewing and testing key project information including: - Earned value management data; - Status of high-priority risks; - Sufficiency of remaining contingency funds; - Internal and external assurance activities; and - Disputes or potential claims with vendors. Sample Question to ask project sponsors What are key external / internal risks? 23

24 6. Actively monitor and improve the project; incorporate lessons learned Adopt a continuous process and measure projects performance against business case (benefits realization) To assist in ongoing monitoring, directors may want to: - Received regular updates on planned and ongoing capital projects to see if the strategy is being implemented effectively; - Determine which key performance indicators (KPIs) and metrics they expect to receive from management; - Stay on top of project performance through remote dashboards; - Use independent subject matter specialists from time to time; - Do a site tour! - Regularly revisit the 5 preceding steps to gauge effectiveness - Encourage discussions around lessons learned, ensure appropriate processes are improved. 24

25 Actively manage and monitor the project starting with three distinct lines of defense Execution (Project Management Team) Implement policies and procedures Manage contracts and monitor vendor performance Identify issues and risks Oversight (Steering Committee) Empower management team Evaluate and question reported data Overview and participate in periodic risk management updates Assurance (Internal Audit / External Consultant) Periodically test project controls Trust but verify establish a no surprises mentality November 26,

26 Managing Project Risk

27 A typical project organization is set up as follows: Board of Directors Corporate Management Team Project Management Team EPC(M) Subcontractor #1 Subcontractor #2 Subcontractor #3 November 26,

28 Procedural framework and mining industry & country specific risks Planning Design Execution Testing Turn-over M & O Project Governance Organizational framework, processes and procedures that provide the foundation for a successful project Organization design and HR management Project resource plan, organization, roles and responsibilities Mobilize and manage project labor Demobilization Operations staff planning Ongoing requirements / skill review Procurement and contract management Contract strategy Contractor qualification and evaluation Contractor selection and negotiation Contract compliance review Trouble-shoot and punch-list Vendor qualification and selection Scope and change management Project definition of objectives and scope Detailed project design and scope freeze Change control Owner acceptance Asset change management Cost management Project estimate Project cost baseline Cost control Final payment / retention release M & O budgeting Schedule management Project schedule requirements Project schedule baseline Schedule management Completion checklist Ongoing maintenance schedule Business systems and technology Project systems strategy Implement project systems System support and maintenance Transition to enterprise asset management Risk and issue management Risk and issue management planning Risk and issue tracking and resolution Confirm issue resolution Ongoing issue management Communication, reporting and regulatory Stakeholder assessment and reporting requirements Project status and regulatory filings Project performance Asset performance Project close-out Operations and financial reporting Safety management Safety management planning Safety training program Safety trend tracking and incident investigation Commissioning interface plan Operations safety program 28

29 1. Strategic Alignment identifying options Identification and selection criteria require project ranking and prioritisation based on constraints and long-term strategy Financial metrics Strategic alignment Risk Embedded value 29

30 2. Organization Capability Everyone is part of Governance Oversight Project Sponsor Assurance Executive Steering Committee External schedule Advisory Board Execution Project Director Project Controls Engineering Procurement Construction Quality Management Commissioning EHS Owner s Engineer EPC Vendor Fabricators Material Suppliers Consultants Subcontractors 30

31 Risk to Contractor 3. Procurement and Contracting What is your contracting strategy? High Privatization Concession (BOO, BOOT) Design Build Finance Operate Maintain Design Build Finance Operate (DBFO) Design Build Finance (DBF) Design Build (DB) Design Bid Build (DBB) Low Low Procurement Strategy High 31

32 4. Governance Control and Technology Scalable Governance / Delivery Models Avoid a One Size fits all approach Capital project delivery risk scenarios $ Time Margin OH/Risk Capex Feed/Opex Mega Project The mega project is an order of magnitude (or more) larger than the typical project for the organization. $ Time Margin OH/Risk Capex Feed/Opex One-Time Large or Very Large Project Capital projects are not executed as a normal course of business and this is a single capital investment. $ Time Margin OH/Risk Capex Feed/Opex Schedule of Small and Medium Projects The schedule involves a collection of projects for meeting a specific objective (e.g. growth or regulatory) $ Time Margin OH/Risk Capex Feed/Opex Capital Intensive Routine Projects The asset base for the company requires steady capital investment to maintain production. 32

33 4. Scope, Schedule, Cost Management Realistic pricing and contingency aligned with level of scope definition 100% <+100% Base Estimate +50% Class 5 0%-2% -30% Class 4 1%-15% Class 3 10%-40% Adapted from the AACE Cost Estimate Classification System +30% -20% Class 2 40%-70% +20% -15% Class 1 70%-100% +15% -10% Level of Scope Definition -50% Project Definition 3%-5% Schematic Design 15%-20% Design Development 35%-45% Construction Documents 90%-100% 0% 33

34 4. Scope, Schedule and Cost Management Integrated Scheduling Processes Group - high level schedule overview Division - Level 1/2 schedules with some level of integration between projects Program/Region Level 2 integrated schedules Project Detailed level 3-4 schedules (standard WBS coding)

35 4. Scope, Schedule, Cost Management Cost to Complete monitoring - Deliver what was promised 35

36 5. Risk and Issues Management Frequently Asked Questions How confident are you that we will complete this project on budget? How have you identified, tracked and quantified risks and issues? Is there sufficient budget contingency/unallocated provision? Which risks are most likely to threaten success? What is mitigation and response strategy to each? Quantitative risk assessments are attractive to leadership because they indicate a range of potential outcomes in terms of likelihood (probability) - not a single point which is closer to reality 36

37 5. Risk and Issues Management Budget/Bid Strategy aligned with risk appetite and market conditions P90 P50 37

38 6. Stakeholder Management Maximizing likelihood of success while reducing exposure to risks associated with each stakeholder. - Determine level of engagement, influence, and impact on the project. - Communicate baseline and plan, and build relationship and trust Stakeholder Analysis Communication Strategy and Plan Identify Stakeholders Analyze Stakeholders Segment Stakeholders Develop Communication Strategy Prepare Communication Plan Identify individuals or groups that have an impact or will be impacted by the selection of an alternative funding method. Assess stakeholders across the following dimensions: Level of influence Level of impact Level of commitment Anticipated resistance Segment stakeholders based on similar characteristics and current positioning across the dimensions of stakeholder influence / impact. Develop a communications strategy to meet the changing informational needs of stakeholders over time. Prepare a detailed communication plan that includes key messages, timing, frequency, and distribution methods. 38

39 Governance

40 A typical project organization is set up as follows: Board of Directors Corporate Management Team Project Management Team EPC(M) Subcontractor #1 Subcontractor #2 Subcontractor #3 40

41 First line of Defense Board of Directors Corporate Management Team Subcontractor #1 Project Management Team EPC(M) Subcontractor #2 Subcontractor #3 Execution (Project Management Team) Implement policies and procedures Manage contracts and monitor vendor performance Identify issues and risks 41

42 Second line of Defense Board of Directors Subcontractor #1 Corporate Management Team Project Management Team EPC(M) Subcontractor #2 Subcontractor #3 Oversight (Steering Committee) Empower management team Evaluate and question reported data Overview and participate in periodic risk management updates 42

43 Third line of defense Board of Directors Corporate Management Team Project Management Team EPC(M) Assurance (Internal Audit / External Consultant) Periodically test Trust but verify Establish a no surprises mentality Subcontractor #1 Subcontractor #2 Subcontractor #3 43

44 Additional Information

45 CP&I Selected thought leadership Risk management and schedule management on mega-projects. Since your day-to-day business is construction, you know construction projects are inherently risky. Managing this risk is essential and, like any other important management or oversight function, is either done well or it is a wasted effort that can risk everything. Capital project owners have focused on improving governance structures; yet too many projects still fail to deliver on cost, schedule or quality commitments. The consequence of failure can be public embarrassment and disappointed stakeholders Quantitative risk analysis. As major capital projects are subjected to greater regulatory and political scrutiny, the pressure on contractors to meet tight schedule and budgetary constraints increases. Often cost and schedule targets are reported without accounting for potential risks and impacts, which leads to an erosion of confidence in reaching those targets. Having a systematic quantitative risk analysis process in place to gauge the confidence level of the project s cost and schedule is important for establishing realistic expectations. Schedule analytics tools As capital project spend increases and aggressive deadlines are built into project schedules, the reliance on accurate, transparent and meaningful schedule practices is growing. Too often, major projects suffer from missed milestones, schedule slippage and delays with no way of determining recovery plans or realistic forecast completion dates. Optimizing capital project delivery. A major US utility was finalizing its plans to construct new plants costing several billion dollars. Working in a highly regulated environment, the client recognized the importance of a strong control environment to manage the project. The client requested a governance readiness review to determine whether its systems and controls could support a project of this magnitude and complexity. 45

46 Questions? Janet Rieksts-Alderman, CMA, MBA, CCSA

47 Thank you! This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisers PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights reserved. refers to the Canadian member firm, and may sometimes refer to the network. Each member firm is a separate legal entity. Please see for further details.