Avoiding the CapEx blowout

July 14,2021
Avoiding the CapEx blowout

Avoiding the CapEx blowout

Our nation’s economy is – by all accounts – recovering well in the face of the COVID pandemic.

While the challenges currently being faced in NSW are a stark reminder that we are not yet out of the woods, the consensus is that we are better placed than most other countries in the world to meet the economic challenges that lie ahead.

The Australian Bureau of Statistics reported capital expenditure increased by 6.3 percent in Q1 2021, and NAB’s May business survey found capital expenditure has recovered to pre-pandemic levels in non-mining sectors. GDP is projected to grow by 5.1 percent in 2021 and 3.4 percent in 2022, driven by domestic demand.

Neil Shepherd, Nutbrook Group’s MD, says asset managers who are developing capital plans in this economic climate have an opportunity to protect their projects and reduce loss.

“If asset owners were exposed before COVID, the commercial impact has probably increased further thanks to a swift and sizable swing to a tenant-led market,” Shepherd says. “Combine that with the complexity of reducing outgoings and accommodating a deferred capital spend, and you have a huge challenge for those exposed in the office and retail sectors.”

The key to success is knowledge, planning and doing the basics well. This allows you flexibility when you need to pivot or adapt your plans because of unforeseen challenges.

“We often hear that capital budgets are ‘there or thereabouts’, provided by contractors with differing agendas during the frantic rush to submit them for approval by a cut-off date,” Shepherd says.

This lack of detail has expensive consequences – in time, money and energy.

“We have lost count of the number of times we’ve been asked to step into help with a project that’s been poorly planned,” Shepherd reflects. “In these cases, we often cancel, reduce the scope or rewrite the total project cost – all steps that could easily have been avoided if a detailed feasibility study had been carried out in good time to provide an accurate scope and tender pricing for budget approval.”

The fallout of poor planning generally emerges long after a capital plan is complete. By that time, the program is unrealistic, the scope is inaccurate and the budget has blown out.

“It then sits with asset owners to rectify the shortfalls, reset expectations and manage stakeholders,” Shepherd explains. “Multiply this by the number of projects approved under the model, and you have a frustrating and time-consuming problem on your hands.”

How does a capital plan review save time?

A quality capital review should forecast 10 years ahead (five years at a minimum) to ensure your processes are sound, your solutions are efficient and you have scope to accommodate change.

While developing plans at the eleventh hour may meet the immediate deadline, chances are you’ll feel the ramifications of rushed decisions and high-level estimations two to three years after they’ve been made.

“During this time-frame, people leave roles and companies,” Shepherd says. “What remains is the ‘blame game’ and asset managers scrambling to review plans.

“A solid 10-year capital plan developed by independent engineers will give you the foundations on which you can build, knowing your projects are well understood, can be led by new team members and have addressed any unpleasant surprises you may have otherwise found,” advises Shepherd.

Can a review save money?

Many of us have experienced the side effects of rushed capital plans. In addition to the cost in time, the resulting errors have a major impact on cash reserves and profitability for years to come.

This can lead to a lack of confidence in the capital process and delayed approvals.

Shepherd advises: “Ensure seed funding for any proposed project is in place the year before. Even without an unexpected roadblock like COVID, the nature of many assets means you will find yourself refocusing every few years.”

So check in on the plan every few years?

Shepherd recommends refining your capital plan after two or three years to ensure it’s on track.

“Just as you would review your suppliers or providers – it’s a process of monitoring costs, budgets, industry trends and economic forecasts to make sure you’re on track.

“A third party can help you with both the immediate workload, and in you saving time and capital in the long run. It also means you can be proactive – working with greater accuracy, insights and efficiency,” he says.

After the bumpiness and uncertainty of the past 18 months, a steady hand and clarity may be exactly what we all need.

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