Completing a capital improvement project (CIP) on time and in budget can be complex — requiring adequate communication and resources.
However, properly preparing for a CIP before beginning the work, completing regular audits after getting started, and following best practices can help your company identify and address potential setbacks before they arise. It can also help your company do the following:
Detect risks and overcharges before they become errors, excessive costs, or litigations
Remain compliant with contract requirements and existing policies and procedures
Maintain tighter construction program controls
Improve internal and external communication
Protect stakeholder funds
Here’s a look at how to set up your CIP for success and common questions your company may want to consider before getting started.
Questions
What makes CIPs difficult?
There are a few factors that make CIPs challenging prior to, during, and following a project.
Multiple sources of information. A utility must analyze and respond to information from many different sources throughout a CIP, including different departments within the company itself, contractors, construction companies, project managers, board members, and employees. This can lead to disorganization and project errors if information is relayed incorrectly or to the wrong recipient.
Communication. Communicating across departments and multiple vendors can be challenging — especially if departments have different objectives, or they’re using incompatible or outdated technology. Establishing a communication structure, method, and strategy is vital to a successful CIP.
Project approach. There are many different kinds of CIPS, which vary based on a company’s size, structure, and specific needs. When considering an CIP, it’s important to evaluate your company’s resources and choose a project structure that will increase the company’s long-term value without overextending resources during construction.
What are some best practices for capital projects as they continue to grow in size and complexity?
Evaluate your goals and resources
It’s important to keep in mind that one control structure won’t fit all types of CIPs. As a project expands in scope, a company may need to adjust its resources and hire externally, rather than trying to take on the CIP in-house. A company can ask the following questions to determine if it needs to outsource:
Who’s on our project team and what are their roles?
Do we have the right resources, skills, and knowledgebase to be successful?
Do we have the in-house expertise to manage the project?
The key to a successful CIP is continually assessing needs over the project’s entire lifetime — making sure the right team is in place as the project progresses. This may mean transitioning team members throughout the CIP’s life to better meet long-term goals, or, if a smaller company is beginning a large, complex project, expanding resources by outsourcing additional team members. This could include hiring experienced management, engineers, financial analysts, or other professionals specific to project goals.
Regardless of how a company assigns project roles, it’s important that all team members understand their responsibilities. As a best practice, a company should communicate responsibilities in writing. This increases accountability and understanding, and it may decrease potential liabilities.
Perform a risk assessment
Prior to beginning a CIP, it’s critical for companies of all structures and sizes to perform a thorough risk assessment. Some potential risks include the following:
General conditions cost
Insurance and bonds
Change orders
Public perception and negative press
Fees and finance management
Labor and related burden
Subcontracts
After assessing potential risks, a company can take steps to gain a complete understanding of each issue and assign team members to monitor and control them. For example, if the CIP includes transporting equipment from another country, a designated team member — either internal or external to the company — should be responsible for making sure the equipment is appropriately insured.
Review policies and procedures
Before beginning a CIP, management should review the company’s construction policies and procedures to make sure they’re complete and user friendly. If a company is starting a significant CIP, current policies and procedures should be reasonable in relation to the project. If they aren’t, new policies and procedures should be established prior to the start of the project.
It’s important to continue referencing policies and procedures throughout the scope of work and, for CIPs with significant capital, require all construction project personnel to acknowledge and adhere to them.
Establish approval levels
All significant CIPs should be approved by a company’s chairman, CEO, or board of directors prior to start date. A company’s size and structure determine who provides approval and the speed at which approval occurs. Prior to beginning a CIP, the following aspects typically need to be approved:
Purpose and scope
Capital plan and budget
Risk and capital-committee structure
If a company is beginning a significant CIP, team members responsible for approvals should also evaluate approval levels and limits. These limits should help the company mitigate risk and allow the project team flexibility that’s acceptable to those measuring the risk.
For example, if a distribution entity allows the general manager to approve disbursements up to $50,000 but later enters into a CIP of $500 million, the general manager’s approval might not still be considered reasonable.
How do you make timely key decisions?
Develop a project team
A CIP’s timeliness largely depends on the efficiency and organization of its project team. Building an effective team starts with identifying key personnel in every department — including accounting, finance, procurement, communications, and construction — and creating a forum for the team to review the project’s progress, discuss concerns, and suggest areas of improvement.
Successful CIP teams not only include professionals from every department, but also often include different personnel at the end of the project than at the beginning. This is because different portions of the project emphasize different areas of expertise. This structure forms a system of checks and balances that helps the team prevent oversight, quickly manage project decisions that affect multiple departments, and address concerns before they become errors or delays.
When should you audit your CIP?
If a CIP is significant, has a change order, or involves other considerable risks, a company should consider an audit multiple times throughout the project — ideally at the beginning, midpoint, and end. Each audit should be tailored to the CIP’s size and scope and should be adjusted to correlate with each part of the project’s timeline.
Initial audit
The initial audit generally takes place after approximately three payment applications are submitted. This audit allows a company to assess and understand initial risk and perform a risk assessment. Elements that should be evaluated during this audit include the CIP’s internal controls, initial costs, schedule; and the managing elements of risk, talent, and scope. The project team should write down and reference assessments during the course of the CIP to verify it’s on track, and any control recommendations should be taken into consideration.
Midpoint audit
Auditing the CIP midway through allows management to verify control recommendations have been implemented and project costs are trued up to date. This audit is important for CIPs of all scopes and sizes, but it’s especially important if a company has outsourced large portions of the project to an external provider. Management should consider current or potential change orders and evaluate project documentation.
Close-out audit
The final audit should occur prior to final payment and should verify cost compliance and change-order management. This audit can authenticate close-out payments, assess whether documentation is appropriate for all change orders, and help the project team determine whether any additional risks exist.
Additional audit structures
Larger CIPs or CIPs without internal resources may need additional audits performed. Other audit options include the following:
Quarterly audit. Larger, multiyear CIPs require this approach due to increased risk as the project progresses.
Ongoing audit approach. In this approach, a company with fewer internal resources can replace internal staffing with audit review of payment applications to achieve efficient resourcing and benefit from auditor capabilities.
Contracts and change orders. Before contract and change-order approvals occur, an audit can verify whether the change orders are in compliance with the contract.
