Upfront: Time To Scrap the RFP?

Huge cost overruns and massive schedule slippage threaten many capital projects. There's a better way.

Huge cost overruns and massive schedule slippage are the norm for capital projects at many organizations. Companies tend to plan projects on a case-by-case basis, treating each one as a complex, one-off effort best serviced and supported by the ubiquitous RFP.

But there's a better way, according to a new Booz Allen Hamilton report. Close to 90 percent of expenditures in most capital projects are external costs, such as material, equipment and labor, the study observes. Businesses can greatly improve project results by taking a leaf or two out of their supply chain management playbook, which specializes in monitoring and minimizing external lead times and optimizing inventory and logistics. Why not leverage that expertise to enhance capital-project management? Because most organizations are juggling multiple projects at any given time, supply-chain-savvy decision-makers can look for opportunities to standardize processes and leverage buying power to strike better deals with contractors and suppliers.

Companies can adapt supply chain management methodologies to capital expenditure projects by taking these four steps:

1. Find commonalities across all capital expenditures. Instead of focusing on each project's individual requirements, leaders should analyze the services, materials and potential suppliers that will be needed to complete a series of projects. The analysis will often identify commonalities and synergies that can help reduce costs and shorten lead times.

2. Drive design modularization and standardization. Companies should apply standard specifications to any manufacturing processes that are common to several projects. They can also standardize support activities, for example by setting up a procurement process that simplifies bidding and eliminates waste in invoicing and purchasing. Major suppliers can often identify potential areas of cost savings, so these partners should be consulted throughout the design and development stages.

3. Leverage relationships with contractors and suppliers. Organizations should strive to establish long-term relationships with key partners while maintaining a level of competitive tension, for example by offering contractors financial incentives to complete their contribution on time and under budget, and penalizing them financially for failing to do so. Instead of relying on the traditional RFP-based bidding process, in which cost and scheduling are the main criteria, companies may want to examine a range of less tangible criteria, including the capabilities of the contractor's management and staff, their innovation skills, and their IT capabilities and experience.

4. Make appropriate organizational changes. Companies should move toward a leaner support infrastructure by consolidating supply-chain expertise to leverage scale and support an enterprisewide approach to project management. "From a CFO's standpoint, what we see is that successful companies have recognized that the execution of capital projects is a critical function," notes Herve Wilczynski, Dallas-based principal with Booz Allen Hamilton and author of the report. "Traditionally, it has been left to operations people with limited career paths; it was viewed as a technical function. Now successful companies see it as a key function that needs to be elevated to the highest level in the company to integrate technical, financial and procurement dimensions."