What Led Zeppelin said – “Yes, there are two paths you can go by, but in the long run there’s still time to change the road you’re on” – is not true. Well, at least not without significant time and cost implications for your project. It is well established that changes which occur later in a project’s life cycle are more costly than those that occur in its early definition phases. This is particularly true in the construction industry, where components may have already been fabricated or installed.
The planning phase of a project is the critical phase in which major directional and scope decisions are made. If the planning phase is given short shrift, the project runs a much higher risk of running late and over budget. This makes logical sense and is also backed up by data.
Top quintile performing organizations invest 7% of the total project budget in planning. Bottom quintile firms invest just 3.5%. The bottom performers pay dearly for this lack of investment in planning. The data shows that the cost of the overall execution phase of the project grows to 110% for these bottom performers, but is closer to 93% of the total budget for the top performers. Because the vast majority of the cost lies in the execution phases, a single percent variance in execution has a much larger impact on the overall project.
Overall capital project execution to time and budget is called “capital effectiveness.” Using two fictional organizations, let’s look at the impact of capital effectiveness on an organization.
- Organization A has a capital effectiveness of 1.6
- 60% more costly than “peer” group
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- Organization B has a capital effectiveness of 0.85
- 15% less costly than “peer” group
If these two organizations are competing in the same market, and each needs to build $1,000,000,000 in facilities in a given year, Organization A will end up paying $1,600,000,000 whereas Organization B will only pay $850,000,000.
As you can see from this example, it is nearly impossible to stay competitive if your organization has poor capital effectiveness, and it is nearly impossible to have a high level of capital effectiveness without investing in effective planning for projects.
Much of the thinking in this post comes from a presentation made by Christopher Luther of Camargo Associates, LLC at the NetPoint User Conference. You can find the presentation here.