Capital projects: Is your board doing enough? A user-friendly board guide for effective capital projects oversight
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Capital projects:
Is your board doing enough?
A user-friendly board guide for
effective capital projects oversight
November 2013
Introduction
When project risks become enterprise risks
Capital projects are key to The board of directors plays a key in them is frequently necessary to
strategy execution; issues role in setting and overseeing an realize the company’s strategic goals
with capital project selection organization’s strategy, including and objectives. Meanwhile, capital
and delivery can create the planning and execution of key project development is becoming
capital projects.1 Too often boards more risky and challenging—as
enterprise-level risks.
discover too late that these capital increased globalization drives entry
projects are behind schedule, over- into new and unfamiliar markets,
budget, or under-performing— compounded by economic conditions
posing potentially significant risk that motivate contractors to shift
to the organization’s strategy and risks back to owners. And the
shareholder value. increasing prevalence of mega-projects
(generally understood to be single
Boards are also finding that even projects valued in excess of $1 billion)
well executed capital projects or has turned project-level risks into
programs can be misaligned with enterprise-level risks. All of these
strategy. Overseeing a company’s factors have made board oversight
capital project development activities of a company’s capital program
can be a significant challenge for more critical as well as more
directors. Setting and maintaining challenging.
alignment between strategy and a
capital program spanning multiple PwC introduces this guide, similar
years can prove challenging. to PwC’s October 2012 Directors
and IT: What Works BestTM, to
For many companies, engineering help boards with effective
and construction activities are not capital projects oversight.
a core competency, but engaging Project performance has
a measurable impact on
share price
1Governance and capital projects PwC research indicates that failure
to meet capital project expectations
In a survey of 36 companies across Many companies lack a has a real and measurable impact
multiple sectors, PwC found that 75 comprehensive and structured
on share price. Additionally, very
percent experienced an average share approach to board oversight
price decrease of 12 percent within few projects achieve the performance
90 days of reporting a significant In another recent survey, only 18 standards described when the
negative capital project event—such percent of 400 corporate directors, project was authorized. Regardless,
as a project delay, cost overrun, or company executives and advisors few companies have a comprehensive
operability challenge. In one case, responded that their board is “engaged and structured approach to board
the share price decrease exceeded (in capital project oversight) from
oversight of capital projects, even
80 percent. strategy through execution.”4
though boards are clear about
wanting to spend more time
Many companies fail to meet Directors report that they would on strategy.
project delivery expectations like to spend more time on
strategic planning—and capital
Only 2.5 percent of 200 companies projects are frequently the
surveyed by PwC reported that their realization of that strategy
projects were on time and on budget
while staying within their original 79 percent of directors would like to
scope and delivering the expected spend more time on strategic planning
benefits.2 In related research, PwC than they have in the past, according
found that 75 percent of projects to Boards Confront an Evolving
experienced budget overruns of Landscape, PwC’s 2013 annual
at least 25 percent. And 50 percent survey of corporate directors.
of projects experience budget
And of that 79 percent, almost a third
overruns of at least 50 percent.3
would like to spend much more time
and focus on strategic planning than
they have in past years.5 Meanwhile,
53 percent of respondents to PwC’s
Center for Board Governance webcast
said capital projects are integral to
their companies’ growth strategy.6
2 Capital projects: Is your board doing enough?In light of these findings, it comes PwC has developed this guide, which • Includes leading oversight
as no surprise that directors would introduces the PwC Capital Project practices to facilitate discussions
like to spend more time overseeing Oversight Framework, to help boards with the CFO, project sponsors,
their company’s capital program. determine what works best to oversee company management, or
However, many directors do not capital projects at their companies. external stakeholders, and
feel they have the subject matter • May help identify capital
expertise necessary to do so. The Capital Project Oversight project issues not currently on
Framework is a six-step process that: management’s or the board’s radar.
What can the board do to address • Provides a structured approach
this? Structured frameworks for for boards to help with their While this report focuses on corporate
project and construction management oversight responsibilities, boards at commercial enterprises,
professionals already exist; however, the same principles apply to boards
• Offers flexibility for customization at not-for-profit organizations in their
they are not designed with the board’s
based on a company’s specific dealings with donors and stakeholders.
oversight role in mind. To fill this void,
circumstances,
The Capital Project Oversight Framework
A 6-step process that...
rovides a structured approach
P
for boards to help with their oversight
responsibilities,
Offers flexibility for customization
based on a company’s specific
circumstances,
Includes leading oversight practices
to facilitate discussions with the CFO,
project sponsors, company management,
or external stakeholders, and
May help identify capital project issues
not currently on management’s or the
board’s radar.
34 Capital projects: Is your board doing enough?
Step 1—Assessment
Determine how critical capital projects are to the
company and the current state of its delivery capability
It is essential for directors to assess or other key strategic goals. The more
the importance of a capital project important the project to achieving
or capital program to the company’s the organization’s strategic objectives,
success before the board can make the more attention it should receive
decisions about its proper approach from the board.
to oversight. Directors should begin
by considering the importance of the Delivery capability in the industry
project (or program) to the company. For some companies, capital project
They should begin by considering the delivery is an essential element of
importance of capital project delivery their business model and an integral
capability in the company’s industry part of their industry. For example,
and various attributes of the company’s resource extraction companies
capital program, such as: are involved in a constant cycle of
• The organization’s demonstrated exploration, production, expansion,
ability to meet board expectations suspension, restart, and retirement
in terms of cost, schedule, and activities which requires the
operational performance of capital-intensive development
previous capital projects; of new facilities during the
normal course of business.
• The budgeted annual appropriations
for such projects; and
For companies in other industries,
• The diversity of the company’s
however, capital project development
project portfolio.
activities are less constant. Utilities
often recapitalize their generating
Importance of capital
stations as old units are retired or
project to company
when regulations change. This can
Some capital projects are routine
result in a 5-to-10 year period of
upgrade or replacement projects.
intense construction activity, followed
Others are designed to make a
by a generation of operations and
significant impact on new product
maintenance with relatively few
development or deployment, cost of
major capital projects.
operations, market entry, expansion,
5Meanwhile, company leaders at other • The company’s historical However, when companies have large
industries may be exposed to capital performance in terms of meeting programs made up of relatively small
projects once in a career, such as at cost, schedule, and operational projects (for example, construction
companies in industries that typically performance expectations for its or remodeling of hundreds of retail
lease commercial real estate but decide capital projects. outlets), each individual project may
to consolidate operations in a newly • Whether the capital project be executed under different regulatory
constructed headquarters building. introduces significantly new jurisdictions, by different contractor
technologies or is being undertaken pools, or with different contracting
Companies with infrequent capital in new or remote areas. strategies or pricing arrangements.
project activity are often more
challenged in capital project delivery Budgeted annual appropriations These distinctions create opportunities
than those with more regular activity. The board should understand the for confusion, requiring formal and
However, even companies with size of the capital program relative repeatable management activities to
regular capital project activity face to the size of the company. As programs occur and reporting to be normalized
challenges in delivery, particularly and projects become larger, project- based on project specific factors.
when introducing new technologies or level risks become enterprise-level In the case of either a single mega-
building in remote or new locations. risks and require targeted oversight project or a diverse program, the
and input by the board. Larger budgets construction activity is integral to
Company’s own delivery also typically mean multiple or more the company’s strategic plan and
capability, including: complex projects, each of which requires appropriately scaled project
increases risk of successful governance and board oversight
Organization’s demonstrated to protect shareholder value.
project delivery.
ability to deliver
The board should understand After considering these factors,
Diversity of company’s
management’s assessment of the directors should conclude on the
project portfolio
company’s project delivery capability strategic importance of the capital
The diversity of the project portfolio
and readiness to undertake a major projects to their company—as well
can be measured not only in terms
capital project, including: as assess whether the organization
of size, scale, and complexity, but
• Whether the company has existing, also by geography, technology, is well placed to deliver the project(s)
formal policies and procedures that vendor pool, and delivery model. on time, on budget and to specification.
guide the team during the execution When companies are engaged in
of its capital projects work, mega-projects boards can focus their
• Whether and how much vendors attention on one management team,
support capital project activity, one delivery model, and one set of
including understanding the reports. We’ve seen board meetings
alignment of risks and incentives held at the site of such projects—
between the vendor community both to give directors insight into
and the company, the status of the project as well
• Whether the company has maintained as to demonstrate the strategic
a core team of experienced capital- importance of the project
project-delivery specialists who to the company.
understand the corporate
strategy, culture, and policies,
6 Capital projects: Is your board doing enough?Step 2—Approach
Agree on the board’s capital project oversight approach
When deciding on the best approach to should add capital project expertise,
capital project oversight, directors should particularly for companies that have
evaluate whether the board or a specific assessed capital projects as a strategic
committee of the board should oversee priority or for those that recognize
capital projects—and whether the current or planned capital project
appropriate resources are available. This activity represents an enterprise-
decision includes considering whether level risk. If so, there are a couple
to add capital project expertise to the of options:
board or engage external consultants.
• Bring capital projects experience onto
the board: Boards can dedicate one or
Who should provide capital
more seats to someone with capital-
project oversight?
project-delivery background such
Thirty-one percent of the 398 as a former construction company
participants of PwC’s Center for Board executive, a former project sponsor,
Governance webcast reported that or a director that was previously
the full board provides oversight of responsible for oversight of major
capital projects, while another 31 capital programs. Some boards have
percent said board-level committees sought experts with specific project
(for example, Finance, Audit, Risk, or governance expertise. For companies
a project-specific committee) provide that consider capital projects critical,
oversight. The remaining 38 percent having such a resource may be
indicated that they were not sure who particularly important.
was responsible for oversight of capital
projects or that it was not performed by • Use outside expertise: At companies
the board or a board-level committee.7 that do not feel an imperative to
develop capital project delivery
Regardless of whether the entire capability as a core competency but
board, a committee, or others are are still engaged in a significant
given the oversight task, the board capital program, a more measured
should consider the backgrounds and approach to capital project oversight
experience of existing directors to may be to seek the expertise
decide if they have the skills necessary of external consultants. In our
to oversee capital projects. If not, experience, boards frequently engage
the question is whether the board consultants to advise them on the
7Donald Campion is a director at four directors, who believe there is room for How often should directors
companies: Haynes International, Inc., improvement in the allocation of specific discuss capital projects?
which makes temperature- and corrosion- responsibilities for overseeing major
resistant alloys; Key Plastics LLC, an auto risks among the entire board versus its
The frequency and intensity of board
industry supplier; Grede Holdings LLC, individual committees.8 Often, an ad hoc involvement in capital projects depend
a supplier of metal components to the Special Committee—such as the one on the level of activity and a program
transportation and industrial sectors; Campion describes—becomes necessary. or project’s risk profile throughout its
and Super Service LLC, a trucking life cycle—from pre-concept to the
company. In 2012, one of the boards The entire board now receives quarterly
updates on the capital project, according final post-implementation review.
on which Campion serves was called
on to approve a major capital project. to Campion. That schedule will continue
until completion, slated for 2014. The Many companies have a “stage-gate”
“It wasn’t business as usual,” he says, updates tell the board “where we stand, approach to project approval, requiring
“so the board had a lot of questions what’s changed, and whether we’re on an incrementally refined level of scope
over the course of several meetings. track or not,” he says.
Finally, we decided to put together
and estimate detail for each successive
a Special Committee for an intense “If you don’t have board members with tranche of funding or approval to the
review of the proposals in the context specific industry experience, sometimes, next stage. Depending on a company’s
of our long-term business plan.” that creates an even larger chasm delegation of financial authority
Campion was appointed chairman between management and the board,”
guidelines and the size of a proposed
of this committee, a subset of says Campion. “We needed someone
with specialized experience at one point, investment, these activities may require
the board.
and we were aware of a top executive board level approval and should be
“We addressed all the concerns of the who had retired recently from a company conducted in the normal course of
board members before we approved in a related industry. We hired him as board activity.
the capital project,” said Campion, an external consultant to help us sort
after which the Special Committee through some strategic issues.”
was disbanded. “But if we hadn’t
Once the board approves a project
created the Special Committee, An objective external perspective can and determines who will provide
we would have dealt with a lot provide the board with an independent oversight, directors should decide on the
of frustration and we might have point of view on the progress of a project timing and format of project reporting,
lost a great opportunity.” and the challenges ahead—well before
how often to meet and discuss
these challenges become full-fledged
Campion echoes 40 percent of respondents problems. Equipped with the appropriate capital project issues, and when to
to Boards Confront an Evolving Landscape, information, the board and management communicate with the project sponsor.
PwC’s 2013 annual survey of corporate can steer the project team back on track. The amount of time the board should
spend on capital project oversight
increases in line with the importance
validation and resolution of reported seek outside assistance rather than of capital projects to the company.
issues after a problem has occurred, wait for a project to become troubled
but too frequently these reports before taking action. In our experience, responsible directors
come after significant costs or delays receive updates at least quarterly when
have been incurred, impairing External consultants can be retained mega-projects (or a large portfolio of
the board’s ability to respond and by the board’s Special Committee, by smaller projects) are underway—and
mitigate the impact of the issues. If management, with a board reporting more frequently after issues have been
a board has assessed that a capital responsibility, or through the board’s identified and corrective action is in
program could pose enterprise-level Audit Committee—in all cases to progress. Reporting associated with
risk to a company (Step 1) but has conduct ongoing reviews of the smaller or more routine programs
questions about its ability to provide project to identify and stem issues should be provided in the normal
oversight, they should proactively before they become major risks. course of business.
8 Capital projects: Is your board doing enough?Step 3—Prioritization
Identify the level of board involvement in key capital project activities
Now that the approach to capital project oversight has been decided, the group
charged with oversight responsibility needs to prioritize which components
of the capital project delivery life cycle require their greatest attention. The
following activities associated with capital project development typically
require board involvement:
Development activity Board considerations
Capital investment Investments should only be made to meet defined
planning (CIP) business objectives. If a project cannot be linked to a
Capital investment planning strategic goal, it is inappropriate to make the investment.
is used to identify, evaluate,
For each capability gap, a number of investment
prioritize, and select
options other than a capital project may exist and
investment opportunities
should be considered.
necessary to fulfill
capabilities required Leading practice CIP processes include a feedback
to meet a company’s loop from project management so that continued
strategic plan. funding of ongoing investments can be reviewed
for alignment with current strategy and evaluated
against new opportunities.
Project development The capital project delivery life cycle is typically
and approval measured in years. Using an incremental development
Incremental planning and approach [often referred to as “stage-gating” and
design activities encourage including activities such as “front-end loading” (FEL) or
orderly development of “front-end engineering and design” (FEED)] mitigates the
a project while enabling risk of having prematurely committed to a project when
directors to make informed economic conditions or company strategy change.
decisions about interim
Progression beyond each stage-gate requires the
funding authorizations
management team to provide a status update and
and allowing for project
additional project details to the board, supporting a
“off-ramps” prior to full
“no-surprises” culture.
fund authorization (i.e.,
“sanction”). “Optimism bias,” the tendency to overstate benefits
and understate costs or risks, is common during
project development activities. An incremental planning
process provides more insight to directors to identify
and resolve estimates impacted by this bias.
9After considering these and potentially Development activity Board considerations
other aspects of the capital project
Alignment of risk and Directors must establish and communicate clear
development life cycle, the board control environment guidance regarding the company’s risk appetite
members responsible for oversight Various project, owner, to avoid assuming unintended risks.
of their company’s capital program and market drivers define
Risk allocation decisions should consider who
should decide which areas deserve a capital project’s risks
is best capable of mitigating the risk and how
the most attention. They should which are subsequently
parties will be compensated for risk assumption.
allocated to and controlled
prioritize these areas for evaluation Owners must establish control environments
or monitored by appropriate
to use their time most efficiently. project participants. capable of controlling retained risk and capable
of monitoring risks transferred to others.
Contract strategy Legal, financial, and practical considerations limit the
selection risks owners can transfer to counterparties through
Contracting strategy defines contracts. This is even true when hiring a construction
the scope of the work to management firm to oversee project delivery.
be procured, the delivery
To the extent possible, incentives of each party should
model, and the pricing
be aligned. Misaligned incentives will result in conflict
arrangement. The contract
and reduce the likelihood of project success.
governs the relationship
between and defines the While vendors typically perform the bulk of the work,
risk allocation amongst directors must remember the organization owns the
the counterparties. project, not the contractor.
Project systems and The board relies on the integrity of the data to make
reporting decisions on the project at each milestone. When
Clear, concise, and reliable they don’t have the right information they can’t
project data is necessary make the right decision.
to evaluate progress, make
If data systems are not integrated or the company
decisions to continue funding,
is relying on offline or manual tracking of information,
and to forecast potential
project owners and managers expend extra time
costs. These systems can
and resources to compile information to be
be fit for purpose but should
reported to the board.
be designed to provide
transparency, ensure High-quality data can be used to provide feedback
accountability, and on CIP and project development activities, improving
maintain an audit trail the future allocation of resources.
of project activities.
Fraud prevention and According to the Association of Certified Fraud
detection Examiners, Inc., current statistics suggest fraud
The engineering and accounts for 10 percent of construction costs.9
construction industry is
Increasing globalization and associated capital project
fraught with fraud risks;
development is increasing exposure to criminal and
acceptable business
reputational risks—via anti-bribery and anti-corruption
practices in some
initiatives such as the Foreign Corrupt Practices Act,
countries are illegal
the Conflict Minerals Rule, and the UK’s Bribery Act—
in others.
and accompanying high-profile lawsuits.
10 Capital projects: Is your board doing enough?Step 4—Strategy
Align capital project activities with strategy oversight
More than half of the 398 participants Directors should ensure that capital
in PwC’s Center for Board Governance project considerations are integrated
webcast said capital projects are into the board’s ongoing review of
integral to their companies’ growth the company’s strategy. The more
strategy. “It’s not just about setting critical capital projects are to the
strategy,” says Mary Ann Cloyd, company, the deeper the board
Leader, Center for Board Governance should probe the company’s capital
at PwC, in discussing the board’s investment plans and ongoing projects
role. “It’s also about the execution to facilitate execution of an effective
of the strategy.”10 strategy. When strategies change,
it may be necessary to alter that
And as PwC analysis has shown, the capital investment plan and even
markets reflect the impact of a capital suspend or cancel ongoing projects
project gone awry with declines in to efficiently allocate resources
share price because a derailed capital among the company’s often
project represents a threat to the competing priorities.
execution of the company’s strategy.
Says Rick Mills, a director at industrial
“Capital investments should only products maker Flowserve Corp. and
be made to meet a defined business steel company Commercial Metals Co.,
objective that is aligned to overall “We spend a lot of time during the early
strategy,” says Peter Raymond, Leader, stages of a project discussing why we’re
US Capital Projects and Infrastructure doing this and our expectations around
at PwC. “In fact, corporate boards markets, customers, revenue and the
and executive leadership should first life-cycle of the facility.” He explains
define the business objectives to be that after defining the parameters of
accomplished, then determine how the project, the board then estimates
select investments will fulfill those the scope of the investment and
objectives before embarking on estimates how long the project will
a capital project. Otherwise, take from start to finish, what the
the project will not accomplish return on investment will be and
the desired objective even if it how long it will take to realize
is successfully delivered.” that return.
11Some questions the board might ask in the short and long terms. “The board
include: “Will this facility serve our is best positioned to take a big-picture
needs well into the future?” or “Do view of how a capital project fits
we need an entirely new facility or into the company’s overall strategy,
do we want to expand the facility balancing risks and opportunities,”
we already have?” says Tony Caletka, Principal, PwC
Capital Projects and Infrastructure.
“We really want to understand the
strategic alignment of the investment Companies can make capital project
before we authorize management delivery capability a competitive
to pursue it. We never want to hear advantage, enabling them to provide the
about a project when we have to make same or better service to their clients at
a decision about it the next week,” he less risk and lower cost to shareholders.
adds. Mills chairs the Board’s Audit Effective capital project performance
Committee at Flowserve and serves on occurs when an organization is aligned
both Finance and Audit committees from strategy through execution—with
at Commercial Metals. “We are very everyone having a clear understanding
selective about the kinds of projects of their roles, including the impact on
we pursue because we want to make project outcomes.
sure we have the right margins and
get the right returns on the Viewing capital project delivery as
investments we make,” he says. integral to the company’s strategy
better allows the board to recognize
The starting point for directors is the potential benefits of improved
an understanding of the company’s performance and the effect that
capital plan and its alignment with capital project delivery can have
the company’s strategic plan—both on the bottom line.
12 Capital projects: Is your board doing enough?Step 5—Risk
“Bake” capital project delivery into risk management oversight
Capital project risks need to be The reasons for capital project failure
40%
included in the company’s enterprise are generally well understood; yet,
risk management plan, especially as capital projects continue to fail to meet
the size and complexity of the capital their defined goals and objectives.
program increases. Some of the more enduring capital
project risks include:
...of directors believe there is As capital project activity increases • Global talent shortages, particularly
room for improvement in risk within a company, associated risks for engineering and skilled labor
oversight allocation among also increase. To understand these positions;
the entire board versus its risks, boards must first have an
• Local interferences, including
individual committees. understanding of emerging trends
community resistance or historical
in the capital construction market,
or environmental land use
such as:
restrictions;
• Is the construction market
• Optimism bias—the tendency to
overheated to such an extent that
overstate benefits and minimize
contractors cannot be expected to
costs or risks;
accept lump-sum contracts (and their
associated pricing risks) without • Misaligned incentives between
including excessive premiums? owners and the vendor community
combined with insufficient owner
• Will local labor shortages create the
oversight of vendor performance;
need to import travelling laborers or
is the work so remote as to require a • Consumption of project schedule
fly-in/fly-out program? contingency (float) early in a project,
leaving little margin for error during
• Will local political and community
construction and commissioning;
leaders support a project of the
proposed scale and how would • Proceeding to execution stage with
local opposition be managed? incomplete design documents and
insufficient financial contingency; and
• Given the current state of the
market and how these factors • Lack of the accurate and timely
will shape the project plan, is the reporting required to allow
owner prepared to assume and executives and directors to make
control the necessary risks? informed management decisions.
13More companies are embedding good risk management practices
into their day-to-day activities, with enterprise risk management
now a common boardroom discussion, according to Bob Moritz,
Chairman and Senior Partner, PwC US.12
Effective risk management requires • Notification of disputes or potential risk event, reputational damage, and
identifying the most significant project claims with vendors. greater impairments in shareholder
and program level risks, the probability value. In more than one situation,
of a negative event occurring, and the Companies should consider how high- CEOs and even board members have
estimated impact if it does occur. In priority capital project delivery risks lost their positions when significant
order to mitigate optimism bias, boards can best be mitigated through effective capital projects became troubled.
should make sure that key individuals internal controls. As discussed earlier,
outside the project team have input to the extent possible risks should “Large capital projects, by their
into the risk identification and be allocated to those best capable nature, tend to be long-term,” Craig
management processes. of mitigating them. But even when G. Matthews, a director on the boards
owners transfer a risk and allow it to of energy companies Hess Corp. and
These individuals should not have a be controlled by others, they retain the National Fuel Gas Co., said. “Factors
proverbial “dog in the race.” That is, they obligation and the right to monitor that beyond your control can impact them.
should have no incentive for the project risk to ensure that the counterparty For example, look at the financial
to proceed or not proceed, but should be has not constructively transferred it crisis and the dramatic change in
capable of independently identifying and back to the owner through changes, interest rates since then.”
assessing impediments to success with a non-performance, or the explicit or
healthy dose of professional skepticism. implicit consent of the project team Matthews adds, “Many of these
and contract administrators. factors are beyond a board’s control,
Boards are best served by identifying but they should at least assess the
for management the specific Construction is too fraught with risk risks involved and mitigate them
information they would like to receive to ignore crisis management as part where they can. For example,
to effectively oversee the capital of the risk management plan. Project hedging against interest rates
project risk management process. teams should identify low-probability/ or energy cost fluctuations.”
Such a list can include: high-impact risks (for example, extreme
• Earned value management data, weather events, political upheaval, or The vast majority of US CEOs agree
such as schedule performance index contractor default) and have contingency with Matthews: 90 percent of US CEOs
(SPI), cost performance index (CPI), plans in place should they occur. These in PwC’s 16th Annual CEO Survey
forecasted budget at completion risks cannot typically be avoided or worry about uncertain or volatile
(BAC), and scheduled completion date; managed, but management should be economic growth.11 However, they
prepared to respond to them and notify also recognize that economic
• Status of high-priority risks including
shareholders about how the company uncertainty is now a way a life.
insufficient vendor performance and
will mitigate the impact of these events. These wider risks, as Matthews
available mitigation strategies (for
In extreme cases, project owners have points out, could well affect the
example, exercising bonds, letters
re-assumed control of their projects from outcome of a capital project.
of credit, or options regarding the
vendors and some projects may need to
replacement of a vendor);
be shut down or abandoned.
• Evaluation of the sufficiency of
contingency funds based on remaining While none of these scenarios will
contingency and current risk profile; likely result in a project achieving its
• Scope of internal and external goals and objectives, failure to respond
assurance activities and related can result in continued exposure to the
observations; and
14 Capital projects: Is your board doing enough?Step 6—Monitoring
Adopt a continuous process and measure results
“In many respects, the board often they will receive these updates
represents the final line of defense from management. The frequency
in delivering the project’s intended of board discussions with project
value to stakeholders,” says PwC’s sponsors and the number of
Raymond. Board oversight should hours spent addressing capital
ensure alignment and control of capital project issues may also need to
project development activities from be readdressed based on changing
strategy through execution and should facts and circumstances.
be supported by the C-suite and senior
• Determine which key performance
management. As the size and scale of
indicators (KPIs) and metrics they
a company’s capital program changes,
expect to receive from management
directors should ask themselves if and
so they can oversee capital projects
how these changes should affect the
effectively: It may be helpful to create
planned level of board oversight of
a director’s dashboard to capture
the capital plan.
these metrics. Directors should also
keep in mind that capital projects
Decisions about how critical capital
experiencing challenges on one KPI
projects are to the company (Step
frequently affect other KPIs. For
1), the board’s approach (Step 2),
example, when a project is at risk
identification and prioritization of
of missing deadlines, the project
the most relevant capital project
management team might accelerate
oversight areas (Step 3), and the
the schedule, thus triggering
integration of capital project activities
additional costs. Directors should
into strategy and risk management
recognize that a lagging indicator in
(Steps 4 and 5), should be revisited
one area may be a leading indicator
at least annually. To assist in ongoing
of future challenges in other areas.
monitoring, directors may want to:
• Engage independent assistance when
• Consider regular updates on planned necessary: Optimism bias is real
and ongoing capital projects to but does not necessarily stop after
address whether the program is being a project is sanctioned. Incentive
implemented effectively: Directors alignment is crucial, not just among
should define how parties to a contract, but also
15between the individuals assigned to can best oversee capital projects over
a project and their employer. Project the long term. Ongoing monitoring
management teams frequently of the effectiveness of the company’s
understand the impaired state of their capital project activities should be
project long before they report it to the supplemented by a continuous evaluation
board. Senior project managers may of the board’s oversight process.
feel that they can resolve the issue in
the normal course of business or Not only do the strategy and economic
even that their career is on the line. conditions evolve, the composition
of the board and its level of capital
By defining and implementing a project expertise also fluctuates.
monitoring process that corresponds Periodic checks of the framework will
with project objectives and works best provide directors with the confidence
for the size and scope of a particular they need to oversee their company’s
company’s capital program, the board capital program.
16 Capital projects: Is your board doing enough?The bottom line
“Listening is extremely Ultimately, capital projects are vital and industry experience to ask the
underrated.” for continued growth and realization right questions. However, says Herb
of a company’s strategy. However, Gaul, a director at Berry Petroleum
— Herb Gaul, Director they do require careful forethought, Co., “I would say my most valuable
comprehensive planning, and lesson has been listening to the
vigilant monitoring. Responsibility questions from the directors who
for day-to-day decisions lies with the have the expertise, listening to the
project management team, but it is responses to those questions, and
up to corporate directors, to ask the then formulating my own set of
right questions of management— questions.” He adds, “Listening
questions that ensure project is extremely underrated.”
performance meets strategic goals
while conforming to the company’s Where capital projects are concerned,
overall tolerance for risk. effective board oversight can make
a significant difference to the
Not every board member may have the company’s ability to set and
specific combination of background execute its strategy.
Endnotes
1 We define “capital projects” as strategic and/or large scale projects involving the design, construction and delivery of plants, facilities and other capital assets.
“Capital programs” are a portfolio of capital projects.
2 PwC, Boosting Business Performance through Program and Project Management, June 2004.
3 PwC, Correcting the Course of Capital Projects, April 2013.
4 PwC, “Center for Board Governance Quarterly Webcast: The Board’s Role in the Oversight of Strategic Growth Through Capital Projects and Other Significant
Transactions,” April 16, 2013, http://www.pwc.com/us/en/cfodirect/events/webcasts/the-boards-role-in-the-oversight-of-strategic-growth-through-capital-
projects-and-other-significant-transactions-april-16-2013-webcast.jhtml.
5 PwC, Boards Confront an Evolving Landscape: PwC’s Annual Corporate Directors Survey, 2013.
6 PwC, “Center for Board Governance Quarterly Webcast: The Board’s Role in the Oversight of Strategic Growth Through Capital Projects and Other Significant
Transactions,” April 16, 2013, http://www.pwc.com/us/en/cfodirect/events/webcasts/the-boards-role-in-the-oversight-of-strategic-growth-through-capital-
projects-and-other-significant-transactions-april-16-2013-webcast.jhtml.
7 Ibid.
8 PwC, Boards Confront an Evolving Landscape: PwC’s Annual Corporate Directors Survey, 2013.
9 Association of Certified Fraud Examiners, Inc., “Construction Fraud: Detecting, Controlling, Auditing,” 2012, http://www.fraudconference.com/uploadedFiles/
Fraud_Conference/Content/Course-Materials/presentations/23rd/ppt/4D-Lou-Urso.pdf.
10 PwC, “Center for Board Governance Quarterly Webcast: The Board’s Role in the Oversight of Strategic Growth Through Capital Projects and Other Significant
Transactions,” April 16, 2013, http://www.pwc.com/us/en/cfodirect/events/webcasts/the-boards-role-in-the-oversight-of-strategic-growth-through-capital-
projects-and-other-significant-transactions-april-16-2013-webcast.jhtml.
11 PwC, 16th Annual Global CEO Survey, 2013.
12 Bob Moritz, “Tackling Risks Head On,” (video), http://www.pwc.com/gx/en/about-pwc/contribution-to-debate/leadership-agenda/risk.jhtml.
17www.pwc.com/us/capitalprojects
To have a deeper conversation about how this subject may affect
your business, please contact:
US Capital Projects & Infrastructure State & Local Governments Acknowledgements
Peter Raymond Sotiris Pagdadis Special thanks to the following board
Leader 646 471 4000 members for their contributions:
703 918 1580 sotiris.pagdadis@us.pwc.com
peter.d.raymond@us.pwc.com Donald Campion
Infrastructure Funds Director
Consumer, Industrial Products, Michael McHale Haynes International, Inc.
Energy, Mining, Utilities 646 471 2628 Key Plastics LLC
Daryl Walcroft michael.w.mchale@us.pwc.com Grede Holdings LLC
415 498 6512 Super Service LLC
daryl.walcroft@us.pwc.com Canada
Michel Grillot Herb Gaul
Stephen Lechner 403 509 7565 Director
415 498 6596 michel.grillot@ca.pwc.com Berry Petroleum Co.
stephen.p.lechner@us.pwc.com
Janet Rieksts-Alderman Craig G. Matthews
Ralph Roam 416 687 8598 Director
267 330 2241 janet.a.rieksts-alderman@ca.pwc.com Hess Corp.
ralph.e.roam@us.pwc.com National Fuel Gas Co.
Contributors
Anthony Caletka Jason Brown, Mary Ann Cloyd, Rick Mills
713 356 5871 Kent Goetjen, Reza Jenab, Director
anthony.caletka@us.pwc.com Cynthia Lorie, Kris Miller, Flowserve Corp.
Asha Nathan, Billy Raley, Commercial Metals Co.
Health Industries Janet Rieksts-Alderman,
Brett Hickman Lee Ann Ritzman, Rebecca
312 298 6104 Weaver, Roger Wery
brett.m.hickman@us.pwc.com
US Federal Government
Rick Rodman
703 918 1007
richard.rodman@us.pwc.com
© 2013 PwC. All rights reserved. PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity.
Please see http://www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for
consultation with professional advisors. PwC US helps organizations and individuals create the value they’re looking for. We’re a member of the PwC network
of firms in 158 countries with more than 180,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters
to you and find out more by visiting us at http://www.pwc.com/US. MW-14-0095.You can also read
