How Proper Capital Project Controls Can Reduce Cost Overruns

Capital project controls are a critical component required to successfully execute a project. Project controls are the processes that include all resources, procedures, and tools required to plan, monitor, and control each phase of capital project lifecycles. This process involves estimations, risk management, schedule and cost management, change management, forecasting, and earned value progressing. Proper use of capital project controls throughout all project stages can greatly reduce the likelihood of cost overruns.

Project controls are critical for projects utilizing time and materials contracts, as they provide the visibility and involvement necessary for project owners to understand the financial and schedule inner workings at a detailed level throughout the project. However, regardless of contract type or structure, proper project controls should be implemented to provide both the contractor and project owner as much information as possible as the project progresses.

In this article, we describe the best practices to follow when applying capital project controls as well as how the project controls are utilized to reduce the occurrence of risks such as cost overruns. 

Capital Project Controls: Key Elements and Best Practices

Below we detail key elements of capital project controls and how contractors should employ them during the pre-contract and bid phase and the execution phase.

Capital Project Controls in the Pre-Contract and Bid Phase

• Work Breakdown Structure (WBS): A WBS is the key organizational hierarchy that syncs a project cost, schedule, and performance against a budget for each level of the WBS. An effective WBS should include deliverable-oriented groupings of project elements and should contain the entirety of work defined by the scope/contract to capture all deliverables that must be completed. In other words, the WBS should cover every component of a project. A project WBS should be defined before the contract is awarded.
• Schedule of Values (SOV): An SOV is the allotment of the whole contract sum to various portions of work. An SOV is often used on complex projects, high-value projects, multidisciplinary projects, and multiphase projects. This allows project owners to manage cash flow and contractor payments as well as to align project cost, progress, and schedule to the WBS. During each instance where a change order is approved, the SOV should be updated to determine an accurate assessment of a project’s progress in terms of percent completion.
• Contractor rate sheets: Contractor rate sheets allow owners to evaluate rates among competing contractors and provide a simple method for identifying reimbursable costs during the project execution phase. Rate sheets support the development of any potential changes that may occur during project execution.
• Project Execution Plans (PEP): A PEP is the primary document that outlines and establishes a contractor’s plan to execute, monitor, and control a project. It will include an overview of all the components within a project’s scope of work, highlighting the critical path of a project and how a contractor plans to execute the project. PEPs allow contractors to create detailed reports to measure a project’s progress and are the foundation for a project’s baseline schedule.
• Project reporting schedules: Project reporting schedules are listings that refer to different sections or exhibits within a contract and highlight the reports or deliverables required from a contract, including the type, format, and frequency in which it will be provided. Often, project owners have internal reporting cycles which can be communicated with contractors to align with what works best for both parties. Reporting schedules contractually set contractor expectations in regards to reporting. Depending on reporting system requirements, software such as Primavera P6v18 or Microsoft Project may be used.

Capital Project Controls in the Execution Phase

• Earned value management: Earned value management is a project management approach used to objectively measure a project’s performance via an integrated schedule and budget in accordance with a project’s WBS. Earned value analysis, typically depicted using S-curve plots, should be done to assess a project’s performance, determining variances between earned value, actual cost, and planned value. 
• Contractor project reports: Contractors should routinely provide reports including progress measurements, manpower histograms, quantity/commodity curves, performance reports, daily headcounts, cost reports/breakdowns, and cash flow reports. In particular, having project controls in place early in the engineering and design stage to identify and track quantities for design will eliminate future construction cost overruns.
• Change management procedures: Effective change management procedures are critical for executing capital projects. Each change request should include a change number, the date initiated, the requestor, a detailed description of change along with supporting documentation, the change type, payment terms, schedule impact, total hours by discipline, and total cost by discipline. For such procedures to be effective and efficient, good procedures must be in place to track changes and incorporate changes into the budget. Best practices include the following:
  

1. Governing documents should specify requirements for the contractor to notify the project owner of any changes.
2. An effective workflow for processing and implementing changes should be developed.
3. Regular meetings should be established between the contractor and project owner to discuss changes.

Utilizing Proper Capital Project Controls to Reduce Cost Overruns

In addition to the above aspects of project controls, a well-defined scope and detailed schedule can aid in the effort of reducing cost overruns. The sooner the scope is fully defined and aligned with the PEPs, the higher the probability that cost overruns can be minimized. The ability to have a highly detailed schedule for work to be performed, containing all of the project scope, and routine updates (preferably weekly) can greatly reduce the likelihood of cost overruns. A quicker update cycle allows contractors to identify delays earlier and work collaboratively to mitigate such delays.

The H+M Approach to Effective Capital Project Controls

At H+M Industrial EPC, we implement best practices for capital project controls for all project types, project sizes, and contract styles to keep you informed throughout the lifecycle of your capital project and ensure we remain on schedule and budget. We provide weekly reports and have a dedicated project controls department in place to further ensure project success.