The construction industry is facing significant pressures. As a result of tightened liquidity in the private sector, reduced government spending, lower margins due to cost increases, new regulations and increased competition from all corners of the landscape, construction companies are looking to drive out cost in their capital projects.
Such transformations can be particularly challenging given the industry’s structural deficiencies, which include inequitable risk allocation, adversarial contracts, late payments, scope changes and overruns. These issues are compounded by regional factors such as stress on contract prices, working capital and cash flow, and obviously the impact from the Covid-19 crisis.
What, then, should industry participants do in order to remain competitive, deliver value and remain profitable? According to Matthew Hanson and Mohamed Abdullah from Deloitte in the Middle East, the answer lies in identifying and removing waste and cost leakage across all aspects of project delivery functions. The consultants share their approach:
Capital projects cost optimisation framework
While measures such as renegotiating contracts and reducing headcount may alleviate cash flow pressure and reduce costs in the short term, they often do not result in sustainable long-term change and can negatively impact the delivery capability of organisations. For example, a reduction in headcount can be counterproductive, as capabilities are significantly reduced in key project management and control areas. Similarly, renegotiating contracts only delays inevitable disputes and causes disenfranchisement within the supply chain.
Cost inefficiencies can occur across the lifecycle of a capital project as a result of a poorly established and fragmented operating model. A more holistic approach to reducing capex delivery costs could therefore be followed, such as the use of a capital projects cost optimisation framework. Such frameworks can identify up to 30 levers for cost efficiencies to be realised across the project lifecycle and throughout an organization’s operating model.
Operating model
Experience in infrastructure and capital projects has confirmed that the most sustainable savings accrue by having the right target operating model as an enabler to continuously identify and remove waste throughout project and portfolio lifecycles.
Given the increased number of mega/giga and complex projects in the GCC pipeline, there is an urgent need to build strong internal capability with which to manage projects to budget and drive the most value from the supply chain.
Organisations should look to optimise costs through considering the following within their operating model:
- Enabling quick and transparent decision-making through well-defined governance arrangements, and fit-for-purpose reporting, to meet tight deadlines and satisfy audit requirements
- Placing collaboration at the centre of procurement and contracting strategies and develop design and execution processes to reflect this approach
- Re-assessing the costs and benefits between in-house and outsourced capabilities and ensure organisational structures are tailored to best support project delivery
- Enhancing data management systems to improve clarity of project performance and support senior management making data-driven decisions
- Leveraging the right systems and technology to reduce operational costs and catalyse collaboration
Cost levers across the project lifecycle
With the right operating model in place, the benefits of tactical solutions and initiatives can be maximised across an organisation’s portfolio. In the short term, and particularly for poor performing projects, tactical interventions can still be implemented to drive cost out of projects as they progress through the lifecycle.
Optimising the capital projects portfolio
To secure long-term and sustainable cost savings, organisations should look for efficiencies in the way they operate in order to thrive in a challenging market. This should begin with the review and prioritisation of projects within the portfolio to help understand where efficiencies can be made on live projects, as well as ensuring future projects are delivered as efficiently as possible.
A capital projects cost optimisation framework can help organisations reduce capital expenditures throughout the project lifecycle in the short, medium, and long-term. By focusing on reducing waste and driving innovation throughout their target operating model, organisations can realize significant cost savings and position themselves for a profitable and successful future.
