Capital Project Planning: How to Avoid the Penny-Wise, Pound-Foolish Trap
January 9, 2024 -
Careful Considerations to Make When Implementing Capital Project Solutions
Look up in any older industrial facility and you’ll see a complex web of unused conduits and pipes. It’s a testament to short-term cost-saving strategies that lead to deferred and costly facility upgrades, ultimately requiring significant capital project planning.
The Costly Cycle of De Minimis Facility Upgrades
A familiar scenario unfolds within R&D facilities: a product group seeks to upgrade test cells for a new product line, only to face a funding battle. The approved budget, substantially less than required, forces drastic cuts to align with the project’s core objectives. Any item not directly linked to these objectives gets chopped. The company doesn’t want to pay for what it doesn’t need right now.
This approach takes its toll on the facility’s infrastructure. Instead of installing a properly sized header to improve distribution, the project gets approved with a cheaper alternative—running additional smaller parallel lines. Installing a new header would cost more now but lower the costs of adding future test cells.
The reasons for this recurring cycle:
- Budget Constraints: Stricter allocations prioritize immediate objectives, sidelining infrastructure upgrades.
- Deferred Investment: Delayed installation of cost-efficient solutions for cheaper alternatives serving only a specific project.
- Future Assumptions: Anticipating reuse of capped-off resources, which rarely happens, leading to perpetual deferral of upgrades.
- Project-specific Utilities: Individual project preference to avoid upgrading older central systems and use project-specific system that offers no broader facility value.
These justifications, often painted as prudent financial decisions, perpetuate fragmented, inflexible and inefficient systems within the facility. Deferring the upgrades also increases maintenance costs and complexity.
Capital Project Solutions: Enhancing Facility Upgrade Processes
There aren’t any quick fixes and implementing the solution won’t be easy. It will require buy-in and enforcement at the highest levels. But it will also lead to better capital investments and more flexible industrial spaces.
#1: Take a Long-Term Approach to Planning
Adopt a visionary perspective despite the challenge of uncertain future needs. While the precise testing needs can’t be predicted, they will all need facility systems. Focus on long-term goals for enhancing facility utilities—boosting capacity, flexibility, and efficiency.
Design systems with expandability in mind and avoid wasteful spending on immediate needs that restrict future expansions. When planning utilities for a specific project, anticipate and accommodate future expansions in the infrastructure design. This might influence the placement of headers or manifolds, for example.
#2: Mandate a Phased Approach to Facility Upgrades
Enforce a strategic phased approach to upgrading outdated utility infrastructure. The overarching goal involves systematically phasing out obsolete or inefficient systems, replacing them gradually with more flexible and efficient designs. This deliberate approach ensures a seamless transition towards improved utility systems without putting current operations at risk. It also avoids the financial impact of large-scale, urgent upgrades.
#3: Mandate Set-Asides from New Project Budgets to Fund the Phased Approach
Institute a mandatory allocation within the construction budget plan specifically earmarked for facility upgrades. This set-aside, a percentage—such as 5 or 10%—of each new project’s budget, directly funds utility enhancements. This approach avoids short-term cost reductions that hamper future scalability.
#4: Revise Project Approval Processes for Holistic Review
Product groups don’t know what other groups are planning. Add a higher-level review mechanism that identifies opportunities where similar utility needs across proposed projects exist and can jointly fund the capital improvements. This would lead to more efficient, centralized designs without inflating individual project budgets.
Strategic Value of a Phased Approach
Embracing a phased approach to facility upgrades, though challenging, promises substantial rewards.
This strategic shift ensures long-term savings, immediate efficiency gains, reduced risks, and controlled capital expenses. A mandated phased strategy not only shares costs but steadily improves a flexible and adaptable facility infrastructure—an investment in lasting efficiency and growth.