Gei Mpa Monitoring Capital Projects

7/28/2019 Gei Mpa Monitoring Capital Projects

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KPMG Glbal Eneg Institute

KPMG International

KPMG’s Ma Pects Ais Pect LeaesipSeies: Mniting Capital Pects an Aessing

Signs f Tuble

There are many historical examples of construction projects

exceeding their budgets—like the Sydney Opera House, where

the actual cost of completion was 15 times higher than the

original budget.1 A story such as this, coupled with the fact that

capital projects represent some of the most costly and risky

endeavors a company will undertake, might make business

owners hesitant to invest in large capital projects.

While numerous factors contributed to the massive cost

overrun on the Sydney Opera House, one of the root causes

was the absence of an integrated framework of process

controls for monitoring the project. Fortunately, there are tools

and techniques that can be used by your project management

teams to reduce the risks associated with capital projects.

This white paper will first address some of the key project

management control areas that will aid in the success of your

capital project. Next, we’ll discuss effective monitoring and

how to identify red flags that may indicate potential risks.

Finally, we’ll discuss some steps you can take if you find that

your project is heading in the wrong direction—where the

schedule is slipping, costs are rapidly increasing, and project

performance is declining.

Using a Pect Management Cntls FamewkMost industry leading practices recognize that the selection

and use of a project management controls framework helps

to ensure project success and avoid major project issues

or failure. The purpose of a project management controls

framework is to put a system of key controls in place alongside

an effective reporting system. Consistent use of a project

management controls framework allows key performance

indicators to be monitored frequently and unfavorable trends to

be addressed early on.

KPMG’s Project Controls Framework (discussed in our white

paper KPMG’s Major Projects Advisory Project Leadership

Series: Governance and Project Controls) is organized into

five main project management processes. Within each of

the main process categories are key project management

controls, which, if properly implemented, can improve your

capital project success. A brief summary of our Project Controls

Framework and key controls follows.

1 | MAjor ProjECTS AdvISory ProjECT LEAdErShIP SErIES

© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provide

client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bi

member firm. All rights reserved. NDPPS 132555

1 Flybjerg, Bent (2005-12-01). Policy and Planning for Large Infrastructure Projects: Problems, causes, cures (Report). Policy Research Working Papers. 3781. World Bank Publications. pp. 4–5. WPS3781.http://go.worldbank.org/6G2FJ40OG0.







PM Pcess 1 – Pgam Stateg, oganizatin,an AministatinKe Cntls:

• Pect Stateg – It is important to develop a delivery

strategy for each major capital project and to get concurrence

of key personnel and stakeholders. No two projects are

identical, and similarly the strategies used to deliver each

project should be unique. Projects should be subject to a

formal authorization and approval process prior to enteringinto contracts and committing company funds.

• Plicies an Pceues – There should be a set of formal

policies and procedures for all core and support process

areas, and these should be regularly reviewed and updated.

Personnel should have real-time access to the most current

version of these documents and should receive training to

promote compliance.

• rles an respnsibilities – In the same way that

organizations define the roles and responsibilities of

their employees for standard business operations, each

capital project should have identified resources with

specifically defined roles and responsibilities. Often, thesimple identification of owner, consultant, and contractor

personnel—along with their areas of responsibility—

will greatly enhance communication among project

team members.

PM Pcess 2 – Cst ManagementKe Cntls:

• Bugeting – The process for developing a budget should

be formalized, so the budget baseline will be robust and

appropriate for the needs of the project. A formal process

also promotes consistency across projects and provides a

framework for monitoring.

• Pament Pcessing an Aministatin – It is critical toestablish a formal payment review and approval process to

control costs on a capital project. This process should be

documented in the project-specific policies and procedures.

PM Pcess 3 – Pcuement ManagementKe Cntls:

• Sucing – To form strong business relationships with

reputable firms, the solicitation process must be formalized.

This formalized process promotes consistency among

projects and will establish a reputation of fairness for your

company.

• Cntacting – Contracts are legally binding agreements, so it

is essential that the language of these contracts be carefully

considered and standard contract templates developed for

consistent use across all capital projects. Involve your legal

department or external counsel in this process.

PM Pcess 4 – Pect Cntls an riskManagementKe Cntls:

• Cange Management – Capital projects are constantly

changing, and in order to effectively manage these changes,

it is important to develop a formal process including standard

documentation and review and approval procedures.

• risk Management – As previously mentioned, capital

projects are risky endeavors, so it is important to have

a process in place for addressing these risks. Risk

management involves assessing risks prior to engaging in a

project and continuously developing and reacting to those

risks throughout the project life cycle.

Energy construction projects can fail for many reason

Poor risk management, scope creep, approval

delays, inexperienced project team or support

personnel, ineffective controls, and improper contrac

administration can all contribute to project failures.

Another contributing factor is ineffective project

monitoring systems.

Implementing an effective project monitoring system

is one of the most difficult project management

challenges, as project reporting for energy projects

requires coordinated information and integration from

all project phases and construction activities, ranging

from early strategy and planning to project closeout a

commissioning. Given the size, scale, and complexit

of many energy projects, organizations cannot afford

to prepare and produce project reports in a reactive

manner. Governing boards, shareholders, bondholde

and regulators are establishing high standards for

project performance in order to help ensure that

projects are delivered on time, within budget, and to

expectations established by the project’s stakeholde

or ratepayers. To accomplish these goals, energy

construction projects should implement leading proj

monitoring systems tailored to meet the needs of

project stakeholders, and regulatory requirements,

and provide an accurate historical record of project

information for future projects as well as operations amaintenance purposes.







PM Pcess 5 – Sceule ManagementKe Cntls:

• Sceule deelpment Stanas – Developing formal

schedule development standards results in project

schedules that include the necessary components for

effective monitoring. IT also promotes comparability

among projects.

• Sceule Cange Management – Schedule change

management is in a category of its own due to the frequency

with which schedule adjustments are made. It is not

uncommon for the schedule to change daily based on factors

such as weather, materials delivery, staff availability, actual

versus budgeted progress, etc.

Effectie Tecniques f MnitingCapital PectsEntities with a robust project management framework can still run

into trouble if they do not apply thorough monitoring techniques.

Monitoring techniques set up feedback loops to assess whether

control processes are operating effectively, and if they are not,

monitoring techniques help to reset control processes tailored

to the specific project environment. Monitoring techniques alsoensure that unfavorable project trends are identified and mitigated

by the project management team.

Based on our experience with troubled projects, the following

monitoring techniques may help you to keep your project on

the right track.

Pect Management reptingTo monitor a project at a big-picture level, management and key

stakeholders must receive status reports that include agreed-

upon information, in an agreed-upon format, and at a frequency

that allows for real-time monitoring and reaction to potential

issues. The most common project failures result from schedule

slippage and cost growth. Examples of trend monitoring that

management may be interested in include:

• Actual percent complete (cost basis) compared to schedule

percent complete—document any differences

• Original budget compared to adjusted budget—budget

changes and transfers should be appropriately tracked and

approved by project management

• Pending change orders and commitments that may be

approved, but which are not yet priced or included in the

project budget

• Other cost risks that are not included in the project budget

• Cost-to-Complete (CTC) based on established cost

estimating techniques (this should not just be a subtraction

of original budget less costs to date)

• Total cost forecast variance from adjusted budget.

Assessment f rles an respnsibilitiesAs the project progresses, observe and gather feedback

about the project management team to help ensure that

roles and responsibilities that were initially developed

remain effective. Continually assess whether the project

team members assigned to each role demonstrate the

appropriate competencies—both internally, within the owner’s

organization, and externally, among contractor and consultant

personnel.

Pect Cst reptingIn addition to higher level cost reporting in a project status

report, be sure to include standardized reporting of detailed

project costs. Key elements of such reporting include original

budget, budget transfers, approved change orders, current

budget, commitments, pending change orders, payments to

date, and forecast.

Preparing summary cost reports is one of the most

challenging project reporting activities for most large

energy projects due to the focus on tracking and

reporting according to FERC accounting requiremen

FERC accounting requirements often make it more

difficult for the project team to reconcile and summa

data from several sources and present accurate proj

financial information in a well organized and consiste

manner. Payment information and procurement/con

information often reside in separate systems, and

budget information, if not approved at a detailed leve

may require redistribution over many cost categorie

Key components of an effective reporting system fo

energy projects include:

• Transparency and accuracy

• Ability to drill down by layer

• Limited redundant information in different system

• Limited # of manual adjustments

• Limited large variances between original submiss

and actuals

For utility projects that will be subject to a prudence

review, it is important that project cost reporting is

timely, and accurate, and provides the level of detail

required to support any requests for additional costs

justify any cost overruns.







Cntact Aministatin an CmplianceOnce formal contracting processes and contracts are in

place, monitor activities performed under the contracts for

compliance with contract terms, and formally track all contract

changes. Key contracting practices also include a process to

select appropriately qualified contractors and consultants.

Pect reiews an Cmpliance AuitingPerform periodic project reviews to monitor risk and to

assess compliance with carefully developed project policiesand procedures. These reviews can be performed internally

or by a third party. The project review methodology should

be standardized to provide for comparability across multiple

reviews. Issues identified should be tracked and reported on a

frequent and ongoing basis and verified for compliance during

subsequent project reviews.

For compliance auditing, be skeptical, especially in your invoice

review process. For example, do not release retention amounts

prior to a contractor finishing its work. Also, during the invoicing

process, be sure to obtain and track unconditional lien releases

to reduce exposure to costly and time-consuming claims.

re Flags an Ptential Pect IssuesWhat do you do if you have great tools for monitoring capital

projects, but you are unsure about how to interpret the

results? How do you know if project trends are favorable or

unfavorable? Capital projects generate huge amounts of data.

Here are some red flags and potential issues common to the

construction industry:

• Project reports that do not change significantly over time

may indicate that their content is not being updated regularly

to represent true project status

• Project reports that summarize overall progress at a very

high level with little or no supporting documentation of thepercentage of completion or the cost forecast may indicate a

lack of competence or unreasonable optimism on the part of

the contractor

• Project estimates or changes without a detailed breakdown

of costs including labor, equipment, materials, and

subcontractors may indicate poorly developed estimates

• Lack of appropriate reviews and approvals or signatures

on contracts and change orders may indicate ineffective

controls or intentional circumvention

• Inability to produce supporting documents in a timely manner

may indicate that project management team members are

skipping steps in your defined processes

• Schedule changes presented without documentation of

potential cost impacts may indicate lack of integrated cost

and schedule reporting systems

• Risk items that do not indicate responsible parties,

status, mitigation plan, etc., may indicate poor monitoring

and risk response.

reacting t a Tuble Pect

Despite your best efforts, sometimes a capital project fails

to meet its performance expectations. The schedule may

continue to slip, costs may be increasing rapidly, and, perhaps,

contractor change order requests and potential claims are pilingup. If this happens, here are some steps you can take to lessen

the risks and costs of a troubled project:

• Increase the frequency of project status reporting—engage

stakeholders more often

Dashboard reports and risk reports are can be effectiv

ways to help identify warning signs for utility projects

A good project dashboard includes the important proj

metrics presented on a single page. If a project dashb

takes more than a few minutes to comprehend or

requires a lot of explanation and other supporting

information, it has not served its purpose to provide q

meaningful, and actionable information to manageme

and other key stakeholders. Dashboard reports are

especially useful for large programs with repeatable

projects such as wood-to-steel pole replacement, pip

replacement, pipeline inspection and hydrotesting, an

major gas or electric transmission or distribution proje

Status of permits, right-of-ways, transmission tower

construction, etc., are all easily communicated via sim

dashboard reports.

Formalized risk reporting has been around for a while,

but it has recently emerged as a standard and valuable

tool in identifying, analyzing, tracking, and responding

to project risks for major energy construction projects

Risk reporting may take the form of a simple risk

register updated on a routine basis or a combination

of risk dashboards, risk analysis, and meeting minutes

discussing risk trends and other important risk

management information. As the success of energy

projects becomes more and more focused on the abi

to effectively manage and mitigate risk, especially

environmental and regulatory risks, the greater the

importance of an effective risk reporting function.



The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or

entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate a

of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriat

professional advice after a thorough examination of the particular situation.

© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent

firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to

obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such

authority to obligate or bind any member firm. All rights reserved.

The KPMG name, logo and “cutting through complexity”are registered trademarks or trademarks of KPMG International. NDPPS

132555

KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 152 countries and have

145,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with

KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and

describes itself as such.

Cntact us

Gen Amstng Pincipal, AisKPMG LLP (U.S.)

T: 415-963-7301

E: [email protected]

Cla L. Gilge

Pincipal, AisKPMG LLP (U.S.)

T: 206-913-4670


Eika Aldiect, AisKPMG LLP (U.S.)

T: 503-820-6603


kpmg.cm

• Get out of your office and into the field—observe contractors

and subs as they perform their procedures to assure yourself

that the project status is what they are reporting

• Consult legal counsel to make sure you have a clear

understanding of the remedies available in the contract—

exercise any remedies that are beneficial

• Assess project documentation practices and address any

deficiencies

• Consider hiring a third-party subject matter professional to

perform a project assessment.

Cnclusin

The costs and risks associated with major capital projects are

here to stay. What you can do is to avoid excessive risks and

failed projects by using a consistent project management

framework paired with effective project monitoring

techniques. Using the tips in this white paper, your business

can make well-informed, proactive decisions that will help

to lead your project down the road to success. And if your

project still experiences some unexpected challenges, don’t

throw in the towel. By reacting expeditiously to a troubled

project, you may help lessen the damage and get your

project back on track.

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Gei Mpa Monitoring Capital Projects