In the US alone, capital spend increased 73.6 percent from $1,105.7 billion in 2010 to $1,919.2 billion in 2019.
Of that, capital spending for structures had reached a high of $769.7 billion, an increase of $340.1 billion (79.2 percent) from 2010 spending. That is almost the same as what it would cost to create 4 million jobs in the US at $200,000 per job. It’s a lot of money especially if you consider the global spend.
And it’s not just across the US. According to Global Finance magazine, “While the US was clearly the leader in capital expenditures through the end of 2021, Asian economies (excluding Japan)—which account for 46% of global capital expenditures, according to S&P Global—have recently ramped up their investment plans as well.”
The dramatic increase in capital spend we have experienced over the past decade is now increasing at an even greater rate and is necessitating a new way of managing projects and programs to optimize investment. The traditional project centric approach is no longer adequate on its own.
According to McKinsey, by 2027, “about $130 trillion will flood into capital projects. The world will see a once-in-a-lifetime wave of capital spending on physical assets between now and 2027. This surge of investment—amounting to roughly $130 trillion1 —will flood into projects to decarbonize and renew critical infrastructure.”
McKinsey adds, “This (project centric) approach will not work for new decarbonization and sustainability investments, where groups of similar projects (such as wind farms and solar parks) are delivered repeatedly over a long period of time and require much better performance than in the past, a project-centric approach also will not work for decarbonizing existing assets, which is a capital-intensive effort that requires long-term planning.”
“Traditional project-centric approaches alone on projects such as a nuclear power plant, an oil refinery, or a pipeline has resulted in cost overruns that approach $1.2 billion on the average project—79 percent of the initial budget—and delays that run six months to two years,” according to McKinsey.
Based on the magnitude of capital spend, increased cost and competitive pressure and the high risk demonstrated by average cost and schedule overruns organizations are putting additional focus what to do differently to maximize their capital budgets.
Although owners often hire contractors to deliver the projects because of the contractors’ experience and expertise, given the magnitude and importance of owners’ capital spend and the risks associated with project delivery, owners are increasing their due diligence and advancing their involvement and processes surrounding project scope, selection, and delivery. The reality is that although available technology and processes have matured, there is still a huge untapped opportunity available to owner organizations.
Taking advantage of systems and data, many owner organizations have already increased their project execution oversight and involvement in order to gain more control over budgets and schedules, increasing their ability to begin operations as planned. Additionally, organizations are increasingly understanding and focusing on the value of project data to enhance the efficient operations and maintenance of structures and assets. Maturing technology including building models, and digital twins provides valuable project data for owner organizations that, until quite recently, was not an option.
One challenge owners face is maximizing the portfolio-level capital budgets as well as the individual projects that make up the portfolio. Budget, cost, and schedule milestones are good indicators of portfolio and project health. Consistent reporting, and insights across the portfolio are critical to help ensure that the portfolio of projects and programs is delivered successfully.
To be able to compare and learn project to project and receive consistent data across projects, it is in the owner’s best interest to have the projects delivered using standard project-wide systems that promote cross-organization collaboration, reduce conflicts and errors, and provide a full project record to support operations and maintenance.
With over 25 years of industry experience, the Oracle Construction and Engineering team has identified four ways owner organizations can mitigate risks and improve results across their projects and throughout their portfolio.
By recognizing the need for portfolio-level integrated cost, contract, risk, and schedule management in addition to consistent cross-organization project management, owners are able to have the control and data they need to make timely informed decisions, take needed action, greatly reduce surprises and learn and improve from project to project to continuously improve capital program management.
Read our new ebook, “Four ways to mitigate risks and improve project and portfolio results.”
1McKinsey footnote: Capital investment will vary by asset class, but on average, an advanced industries company in North America can expect a spending increase of 65 percent over the previous period. An energy and materials company in Asia will see an increase of 57 percent. Across asset classes in Europe, McKinsey projects a 59 percent increase in capital spending, driven by an increase of 120 percent in European energy and materials spending. Our $130 trillion estimate is based on data from African Development Bank, Asian Development Bank, Capital Excellence practice analysis, Global Insight, Global Water Intelligence, International Transport Forum, MEED, Moody’s Analytics, National Accounts data, World Bank, World Energy Outlook, and McKinsey Global Institute’s net-zero analysis.
Oracle Construction and Engineering, the global leader in construction management software and project portfolio management solutions, helps you connect your teams, processes, and data across the project and asset lifecycle. Drive efficiency and control in project delivery with proven solutions for project controls, construction scheduling, portfolio management, BIM/CDE, construction payment management, and more.