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Management Side
Week of 13 January 2020: The Emotion in Capital Budgets

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When you are in the trenches looking up, it is often easy to see the perceived capriciousness of capital budgets. Hence, as the project manager overseeing the actual project implementation, it is sometimes easy to be lackadaisical about the funding. Do this at your own peril. I once visited a mill where a rebuild planned and approved at $20 million was over budget by $22 million. I couldn't believe it, but I was left even more incredulous by the project manager's question to me, "Do you think they will fire me?" My thought to myself was simply, "I am surprised they have not fired you already, buddy."

It turns out there had been a huge amount of jerking around from on high in both schedule and scope, so perhaps some of the overage was unavoidable.

But none of it was justified. I was not close enough to the inner workings of the organization to know where the errors were, but I can say this: someone somewhere did not do a good job of planning and considering the options and pitfalls that may have arisen. This is an old example, nearly thirty years old, but I am here to tell you that such inept performance is not found only in ancient history.

My consulting business is heavily involved in capital budget planning. The scenes I have seen, the decisions that have been made and executed are sometimes amazing. The poor decisions involve design, equipment selection and contractor selection--in other words, they run the gamut. When you dig into most of them, good and bad, they are often based on emotion and history.

I've given some thought to why this happens. I think it comes down to two or three reasons. First, people just don't want to take the time to research the options and experiences of others. Second, their minds are already made up. Third, they adopt wishful thinking and believe they can produce the most economical project ever executed.

The first reason, time, I have seen exhibited at all levels in organizations from board positions to the youngest project engineer. People either don't want to take the time or they are concerned about "paralysis by analysis" and just don't believe they need to take the time to do thorough research and build a competent plan. This can happen from laziness or pressure from outside sources. For instance, I know of one company right now that has been mandated from on high to do a certain fairly complicated project by the end of 2020. The first estimate for the first item on the budget spreadsheet has yet to be entered. What's their chances of getting the correct budget, scope and meeting the completion date? This project is being driven by emotions somewhere in the organization.

The second reason happens when a venerated older member of management forcefully declares knowing how to do a certain project. This person may have been dreaming of doing this project for decades. That's just the problem--those dreams have not been updated for decades. I saw a project a number of years ago that, while declared a success, was probably overbuilt to the tune of $100 million or more.

The third reason, wishful thinking, usually comes from a manager placed in charge of a capital project without experience. Oh, this person may have a lot of experience in the industry or even in the company; it just has not been in capital projects. Such people have looked at projects from afar, wondered why they cost so much and now chaff at the chance to show those project engineers how to do it. They fall flat on their faces. I have seen this scenario too many times to count.

In front of all capital project exercises, starting with the first item put on the first piece of paper, there should be a sign: "Capital Project Ahead: Proceed with Caution."

For safety this week, often one of the biggest failures in capital projects is not taking into account the financial costs necessary to make a project safe. It is money well spent to engage an expert for this estimate up front.

Be safe and we will talk next week.


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