Helping boards improve capital project oversight
A recent report by PwC aims to provide helpful tips to boards struggling to oversee large capital projects at their companies. As the report notes, organizations often need to take on engineering and construction activities to achieve their strategic goals, even though these activities aren’t a core competency for many of them.
At the same time, capital project development has become more risky as companies have been driven to enter new, unfamiliar markets, while unstable economic conditions have spurred contractors to shift risks back to owners. The explosive price tags for some of the bigger projects have turned project-level risks into enterprise risks, according to PwC’s report, ‘Capital projects: Is your board doing enough?’
All of these factors have made it more challenging for boards to effectively oversee their companies’ capital programs. With regulators increasingly on the lookout for potential fraud, board oversight is more critical than ever. Fraud now accounts for 10 percent of construction costs, according to statistics from the Association of Certified Fraud Examiners cited by PwC.
The report, released in November, summarizes the findings of one of a handful of recent surveys PwC has done to examine capital project risk. One survey of firms that were constructing large-scale infrastructure projects found that three quarters of them had trouble with delivering on time and on budget. Another survey on the impact of project mishaps on share prices found that public announcements about cost or operability challenges that companies were facing drove down their share price by an average of 12 percent within a few days of the announcement.
The boards of companies with less experience delivering capital projects aren’t as accustomed to overseeing such projects as their counterparts at firms that undertake these projects more frequently. In the former case, ‘those boards are reaching out,’ says Peter Raymond, leader of US capital projects and infrastructure at PwC. ‘Maybe they look for directors [with capital project experience] if they’re entering a campaign of major capital investments or look for outside support or expertise.’
When a company undertakes a major capital project that may take several years before the new facility comes on-line as part of its broader business strategy, there are risks that boards must be aware of, warns Raymond. If boards aren’t committed to tracking the markets or seeing the strategy all the way through execution, they run the risk that the facility could be outdated by the time it’s completed, particularly if there have been delays due to budget or operability problems, he adds.
In PwC’s latest survey, just 18 percent of respondents said their boards remain engaged in overseeing capital projects from strategy through execution. That’s why ‘having the right systems to track project execution [is critical], so you get good data on a regular basis right to the C-suite and to the board, so you know what’s happening with these projects,’ says Raymond.
Another imperative is taking time to establish a comprehensive governance structure around complex projects, he says. ‘If you have the right governance structure and people who understand the delivery of these projects, either the internal audit function or another form of oversight, these help keep projects on track.’
Other factors for boards to keep in mind include who the project sponsor within the company is, what the reporting requirements all the way up the chain of responsibility are and what kinds of independent validations are being done, whether through internal audit or outside advisors, in order to give directors a high degree of confidence that a project is on track to meet its target.
For boards less used to delivering capital projects, it may be appropriate to create a special committee of directors with relevant expertise to oversee a major capital project, says Raymond. Such committees can provide the independent analysis that is needed to keep a project on track.
All of these considerations can apply as much to large information technology projects that companies take on as to physical projects such as factories or power plants, says Raymond. That’s something for all boards to keep in mind as more companies undertake ‘big data’ projects in the years ahead.