Five ways to ensure you accomplish your capital project goals
Plan for all impactful items and align on goal metrics to ensure total project success.
In my past role overseeing capital planning, we would allocate capital to programs that represented thousands of projects, believing we had clarity on items to be accomplished. Presentations to executives were always at a high level, so much of the important details were never discussed.
However, after projects were complete, there always seemed to be someone who didn’t agree that the teams had met their goals, or at least maximized the project’s potential.
Here are some common areas of misalignment and how you can ensure this doesn’t happen to you:
One - It took longer than I thought.
The most common issue I encountered was that projects spilled into the next year. They didn’t overspend, but the project was late – this was often because funds weren’t released in time to meet the schedule that was presented. Companies often have financial covenants limiting capital spending, so this creates two problems: the benefits aren’t there, and following year’s capital budget has to accommodate this spending, which may push other projects out.
SOLUTION: If you are reasonably certain the projects will be approved, release permitting monies in the prior year so projects start on time. The amount of funds is minimal and should not cause spending problems in the current year. Also, by tracking spending patterns alongside the work schedule, you can estimate how much is likely to occur this year, so you might release future projects early to balance spending.
Two - I didn’t overspend.
When you budget dollars, be clear on the number of projects expected. I had one VP argue that they had NOT overspent on the 40 remodels they completed, despite the fact that the money was intended to do 50.
SOLUTION: After programs are approved, plan a second round of approvals of the project list to ensure store choice and count are aligned with expectations. By giving visibility to the list of projects, other departments can voice any concerns on the candidates or request stores with more urgent needs.
Three - Who cares if it’s expensed?
Unless they’ve been conditioned, Construction Managers (CMs) don’t distinguish between capital and expense dollars. There are many ways this can create unpleasant surprises:
- If the initial request does not differentiate expense amounts from capital, they wouldn’t have even asked for what they need.
- If capital costs start to go over, contractors will sometimes code bills to hide capital dollars in expense, believing that this doesn’t get the same attention. AP clerks usually don’t understand enough about construction to spot irregularities.
- Conversely, if expenses start to run high, CMs might replace repairable items to meet capitalization minimums.
SOLUTION: Simply make each program and project submit both capital and expense budgets. You can help the CMs by coding your budget template items as either capital or expense; this automatically translates “work” into accounting.
Four - Not communicating with affected departments.
Capital programs affect more than just operations and finance. Your lease renewal team’s efforts might be compromised if you remodel stores while they are negotiating rents – it undermines your threat to leave if you just spent a lot of money there.
SOLUTION: You may have many years of term remaining, but if the next option is a negotiated rent, you can save a lot of money by coordinating your capital planning with rent negotiation. List the Next Option Type as part of your project approval criteria and request your asset management team to accelerate negotiations on any prime store candidates.
Five - Not learning from your projects.
One of the biggest issues of capital project management is not following up to see if you are getting the returns from your projects. This is fairly easy with new stores, but more difficult with remodels and new equipment.
- For remodels, you must track sales changes, realigning sales to be “weeks after remodel”, regardless of when that week is. You also have to track stores NOT remodeled in the same period for comparison.
- For equipment changes, you must do the above process, but at the sales category If energy savings are a big component of your returns, you might have to pull expense data on this basis.
- Compare the returns of different store/project types to see which are the highest: by project scope, by beginning sales levels, etc. You might be able to improve returns, even in successful programs, by eliminating low return candidates.
SOLUTION: In your approval process, make sure you require the teams to articulate how they will report project returns and schedule monthly/quarterly review meetings. Ensure you get returns by holding teams accountable for delivery of returns as well as execution. Remember, “You never make the same mistake twice, because the second time, it’s a choice” (Lauren Conrad).
Nearly all problems with capital programs start with insufficient planning – not because someone doesn’t know the issues, but because we don’t tally and track them. This creates obstacles across your organization as they try to fix these issues later. Your planning team can be an asset to development if they can anticipate these issues and remove obstacles for them.
Successful capital programs don’t have to be difficult. At Tango, our solutions organize data collection needed to execute a program like this and align spending with budgets. You can smooth out real world challenges only if you know about them early enough.