Reducing the cost of infrastructure and capital projects

21 October 2020 6 min. read

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.

Capital Projects Cost Optimization framework

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.

Feasibility and engineering
Experience shows that projects with inadequate front-end planning have a greater probability of incurring large cost overruns. During the early project phases, proposed specifications and design standards should be carefully assessed and challenged by project teams to ensure they satisfy user requirements, are buildable and provide the greatest value for money across the asset lifecycle.

Using collaborative and advanced digital technology for optioneering and multi-disciplinary design optimisation (such as value engineering using BIM) can also facilitate the identification of cost-saving opportunities before (and during) construction.

Procurement and contracting
Developing a tailored program-wide procurement strategy that defines and optimises procurement routes for individual project elements is a fundamental prerequisite for obtaining the best value from sourcing activities. This should take into consideration project-specific factors such as cost, schedule, quality, supplier relationships, risk allocation and management capability. Clients should place equal importance on establishing strong contract management capability to actively manage supplier performance while pro-actively avoiding engaging in expensive and resource-sapping disputes.

More collaborative procurement and contracting approaches, that encourage risk sharing and ‘open-book’ workshops for example, should also be considered, given their ability to deliver major cost savings.

Construction and handover
The application of lean construction management techniques can help to reduce resource wastage and streamline construction management processes. This includes the use of digital tools for simulating complex building processes, make-ready planning, and resource optimisation. Organisations should incentivise the supply chain to use these principles and technologies during implementation to benefit from increased productivity and quality of execution.

Strong project controls processes and by-exception reporting that is accurate, timely and clear is essential in supporting decision-making to save costs on projects. Poor project controls practices on projects lead to a limited understanding of how a project is performing against plan, which in turn leads to delayed decision-making, ineffective governance and wasted capex.

As the project reaches the handover phase, having a structured and data-driven asset handover process is critical to eliminate inefficiencies during the commissioning and handover of assets and ultimately then in the maintenance of the assets for the owners.

Portfolio prioritisation of cost-reduction initiatives

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.