Share

What are capital projects and how do they fail?

Written by: Richard Frykberg

Capital projects are critical to the success and future of an organization. Capital projects involve large investments or upgrades to physical assets such as infrastructure, facilities, equipment or technology that can have a significant impact on the organization’s operations and performance. By thoroughly understanding the different capital project types, an organization can achieve strategic goals.

These strategic goals could include increasing efficiency, expanding its product offerings, entering new markets, or improving its competitive position. Unfortunately, capital projects frequently fail to meet their schedules, budgets or both.

Here we discuss the four main reasons capital projects fail so that you can identify and avoid pitfalls with your capital projects:

The Four Main Reasons that Capital Projects Fail

1.   Poor Capital Project Definition

It’s no surprise that sitting at #1 reason capital projects fail are when their project scope, implementation schedule and budget are not clearly defined. By their very nature, capital projects are high value, important and urgent, and are typically complex. Getting the project definition ‘just right’ is not easy: and both too-much and too-little definition have adverse consequences.

  • Under-Analyzed

    Undertaking poorly defined projects is an obvious risk. The motivation, objective and required investment of time and money in an initiative require definition to even assess success or failure. Nevertheless, in practice this happens all too often. Investments are made in very roughly defined pet-projects to the perplexed incredulity of other stakeholders.  We did what? With no yardstick to measure the inputs or outcomes, it can be assumed that a significant proportion of these investments would have incurred an excessive commitment of resources for the benefits produced.

  • Over-Analyzed

    By contrast, over analysis can also be a cause of failure. Too much time is invested designing and estimating bad ideas. Because of ‘analysis-paralysis’, over-analyzed projects start too late. Deferring benefits. Or worse: projects are delivered too late to mitigate the operating risk they were intended to address. A key indication of over-analysis is when investment proposals over-emphasise the ‘what’ and the ‘how’ rather than the more important ‘why’.

  • Under-Estimated

    Rosy ‘happy-day’ estimates help get projects over the line. Often with catastrophic consequences. Suppliers get forced to deliver to unrealistic constraints and quality suffers. Or work is abandoned. Insufficient internal resources are allocated for effective design, validation or change management. Consequently, projects are delivered but not adopted due to the lack of preparation and training. Or operating outcomes materially fail to deliver the expected benefits. Avoidable risks are not fully mitigated with dramatic impact. Project ‘contingency’ funding is too often fully utilized, and not reserved for truly un-predictable events.

  • Over-Estimated

    This is when estimates are too generous. Too much funding contingency is provided. Too many scarce resources are assigned. The project is comfortably delivered. But at what cost? Over-investing in critical project A, may mean that just as important projects B and C are not delivered. As stewards of an organization’s resources, executives are compelled to seek maximum value without fear or favor.

  • Unspecified Results

    Starting any endeavour without a plan may achieve something. But normally this course of action leads to sub-optimal results. Even if benefits are derived, could more have been achieved? Could they have been achieved for less? Assigning corporate resources to a project manager without any specification of outcomes is a dereliction of executive responsibility and very likely to be a primary cause of failure.

  • Over-Specified

    Expecting to have a very detailed specification at the start of a project is also, however, unrealistic. Or worse: it leads to sub-optimal outcomes. Design is a phase of a project: it is not done effectively or efficiently prior to project initiation. Over specifying a solution is indicative of a poor project delivery methodology. The project team should be given clear targets and reasonable allocation of initial funding. Project delivery methodologies should actively mitigate technical and commercial risks early in the project lifecycle: this helps refine forecasts to complete and expected benefits on realisation.

    Provided a project continues to indicate high value return from future investment it should be progressed. If not, it should be halted as soon as possible. Therefore, over-investing in all aspects of design too early is inefficient if the project is never going to achieve completion. Modern project delivery methodologies employ agile principals including iterative risk-mitigating cycles to ensure prioritized design and delivery of critical features first, acknowledging that some features may never be designed or delivered as more important requirements emerge and investment thresholds are reached.

  • Too Soon

    Projects that seek to replace assets or mitigate compliance or other commercial risks too soon are a more subtle form of failure. Whilst these projects may be successful in their intended purpose, again the question is ‘at what cost’? Given resource constraints it is important that projects that can be safely deferred, are deferred. This allows more critical projects to commence sooner. This risk of committing resources too early is hard to manage, as most sponsors are conservative by nature and err on the side of caution.

  • Too Late

    Of course, delivering projects too late is possibly even more ruinous. In practice, organizations get the timing ‘about-right’ not through effective prioritization but application of excessive resources to accommodate parallelization. Because projects are inappropriately prioritized, they tend to start too soon, and then take too long as resources are stretched too thinly. This incurs excessive cost and delivery risk.

2.   Capital Project Portfolio Selection

What systems do you have in place to choose the right capital projects and reject the wrong ones? Here are some of the reasons capital projects make the cut when perhaps they shouldn’t have.

  • Undue Influence

    In many organizations, to get a project approved, it’s not ‘what you know’, it’s ‘who you know’. The power of influence stems right from the top with executives pushing pet-projects. The more capital funding approval gets devolved, the more pet-projects spring-up. It’s an unavoidable human characteristic, that we’re unduly influenced by persuasive argument. And with a lack of high-quality and comparable data, the only basis for a decision will be persuasive argument. The slicker the presentation, the more astute the pitch, the greater the likelihood of human-bias and sub-optimal projects being selected.

  • Poor Quality Information

    Executives will rely on their intuition, experience, and persuasion when the information is presented is unreliable. Information is poor quality if it is incomplete, misleading, invalid, or inaccurate. This may be because of delays in collation, errors in preparation and transcription, or distortion. A common example of misleading information is the reliability of estimates. Often costs or benefits are presented as a single best-case number. In reality, a broad range of possible outcomes is possible, and failure to represent this information effectively can result in executives making inappropriate choices.

  • Incomparability

    A key requirement for executives to fairly assess a list of possible investment needs and opportunities is to have reliable bases for comparison. Trying to compare replacement and growth initiatives is not practical, for example, as replacements projects are primarily motivated by risk to operations, whilst growth opportunities are primarily assessed on net present value. When executives are not provided relevant classifications (such as the investment reason), or the comparison metric is not reliably determined (eg inconsistent discount rates applied), it is very likely that the project selection will be inadvertently biased and therefore sub-optimal.

  • Multi-Dimensionality

    Where more than one comparison measure is provided, a new problem emerges: how to simultaneously evaluate multiple dimensions. This becomes orders of magnitude more complex, the greater the number of dimensions. Typically, organizations would consider absolute cost, together with benefits, urgency, implementation risk and strategic alignment together with funding and human and other resource constraints. Without defining an agreed weighting and assessment methodology, each member of a capital planning committee may apply their own inherent biases, resulting in protracted debate, and ultimately selection based on influence and not rationality.

Learn how to leverage artificial intelligence tools such as ChatGPT for capital projects that require high quality project proposals.

3.   Capital Project Execution

Even well-defined, appropriately selected capital projects can fail in the execution phase.

  • People

    To err is human. Through lack of expertise, time, or motivation, people don’t always do the right thing. One of the most critical people involved with project execution is the project manager. In many organizations, this is a scarce resource, and individuals are often overloaded and lack the capacity to ensure project success. Business resources are essential to define requirements and validate outcomes. They too are often under extreme pressure with business-as-usual activities and are often not backfilled to ensure effective engagement and change management. Supplementing internal people with external contractors may fail as they may be more aligned to their own daily rate and contract duration than the business outcomes.

  • Technical Risk

    Contemporary projects typically involve the introduction of new technology. This introduces the inherent risk of technical failure in the organization’s unique operating environment. Conversely, failure to adopt new technology may incur additional cost or competitive disadvantage. Projects fail because technical risks are not actively addressed throughout the project lifecycle.

  • Process

    Projects fail in the execution phase because of a lack of process to mitigate inherent human and technical risks. The art of effective project delivery is to establish an effective methodology for managing these risks effectively. Where project execution methodologies are poorly defined or immature, inherent risks are more likely to eventuate.

  • Planning

    The most critical responsibility of project managers is to actively plan the execution of projects, and apply mitigating actions when deviations occur. Projects that proceed without ongoing planning of activities and resource consumption are doomed to failure.

  • Monitoring

    A plan is only effective if it is monitored. Adverse variations to plan indicate the need for mitigating action. Projects fail when management do not have reliable cost, schedule, scope, risk and other Key Performance Indicators to monitor, or do not action exceptions when they occur.

  • Co-ordination

    Large scale capital projects are often related and conducted in pursuit of defined strategic goals and objectives. There is inter-dependency of deliverables and resources. Lack of co-ordination of these projects therefore can be a cause of failure.

  • Procurement

    The key external facing activity of project execution is procurement. There is invariably more than one option for solving a problem or addressing an opportunity, and alternative solutions may be proposed by various suppliers. Projects can fail when the wrong suppliers are engaged. This can be equally a result of undue reliance on incumbents, or ineffective qualification of new partners.

4.   Capital Project Validation

Project sponsors are subject to a moral hazard when they are not held accountable for the promises contained in their business cases. Most business cases are a finally balanced trade-off of risk and return. Slightly understating the one, or overstating the other, may be all that’s needed to get approval to proceed. Therefore, a common reason for projects failing to deliver to expectation is that outcomes are not formally assessed, responsible parties are not held accountable, and practices are not improved.

  • No Post-Investment Reviews

    To determine the success or failure of a capital project it is necessary to conduct a post-implementation review. Costs are easy to measure. But on their own are not a determinant of failure. Capital projects that come within budget can be failures. Capital projects that cost double their initial estimates may be deemed successful. Because success or failure depends on the benefit derived. Delivering a capital project on budget that fails to achieve its objectives is failure. Capital projects that deliver a significantly higher net present value, even at twice the investment, are a success. Unfortunately, assessment of benefits is much harder than measuring costs.

    Capital investments, by their very nature, are long-term in nature. Or mitigate risk which in practical terms may be difficult to measure. This may require independent reviews over many years. Nevertheless, failure to conduct a post-implementation review is likely to encourage, or hide, project failures.

  • No Accountability

    Capital projects are very likely to fail if they are nobody’s responsibility. Many individuals are typically involved in a project definition, selection, execution, and review. These individuals, their roles and their contributions, comments, endorsements, and approvals are intended to help deliver success. Failure to retain these records will increase the risk of dereliction of responsibility, which ultimately may lead to an increase in adverse project outcomes.

  • No Improvement

    No successful organization or entrepreneur has succeeded without failures along the way. A complete lack of failures may indicate that the project portfolio has become too timid and conservative. Failures present an invaluable opportunity to learn. Ongoing, and disproportionate project failures, are, however, more likely when these learning opportunities are not acted upon. This may require adjustments to the way your projects are defined, selected, executed, or validated. As Henry Ford proclaimed: “The only real mistake is the one from which we learn nothing”.

Digital Solutions Reduce Failure of Capital Projects

As we conclude this article, covering the four key reasons why capital projects fail, it would be remiss not to offer a solution to the problem.  Capital project failure is related to the way projects are collected, defined, ranked and selected. Get this right and your project portfolio with align to organizational objectives with consideration to human resource and budget constraints.

The key lies in Front-End Loading (FEL), a project management approach that emphasizes the importance of careful planning and preparation before the start of a capital project. The purpose is to ensure that owners can make investment decisions, minimize risk and maximize the potential for success.

SaaS solutions like Stratex Online are digitally transforming the FEL process to enable you to select the optimal project portfolio for execution based on your strategic priorities. From project demand management, to project forecasting and reporting – Stratex Online can help you.