What is capital efficiency?
In simple terms, it is about getting the biggest bang for the buck. It is about reducing the total cost of ownership of an asset over the entirety of its life cycle. It is about driving affordability. Today, we struggle to achieve affordability of many of the assets that comprise the built environment, impacting both the quality and extent of these assets.
For many, affordability is about reducing first cost but this is only one of the levers available to us to pull to improve capital efficiency. To achieve real affordability we must pull all of the available levers, improve our execution efficiency and, importantly, rethink our basis of design.
Here we seek to outline some guiding principles to improve overall construction affordability and asset life cycle capital efficiency. The principles and recommendations laid out are generally structured along the lines of the principle levers of capital efficiency, with some additions to give weight to certain specific points:
- Project Management
- Asset Availability
- Premium Pricing and Financing
- Operating Philosophy and Practices
Large complex construction projects require new a “theoretical” and contextual basis. The current theory of project management does not scale well – two out of three large construction projects fail. This new theory requires strengthened foundations related to owner readiness; new risk models and modelling; and assumption tracking. Project flows and interactions between tasks and activities require heightened focus, recognizing flows are subject to disruptions with severe cost impacting effects. Finally, this new theory recognizes that stakeholder engagement must be strengthened and made more transparent to better anticipate and influence flows from the broader stakeholder set that sweep into the project creating a multiplicity of impacts. Today’s large, complex projects are not as well bounded as current project management theory inherently assumes.
Project management systems to support design-build delivery must more tightly integrate the contractor’s requirements for “pieces” of design providing more granularity in design deliverables, such as what might be required for a specific permit or approval. Big analytics must complement the world of big data in which our projects live. New project data sources, associated with the potential impacts of externalities, must be incorporated into design and construction activities. Improvements in this project management lever can be accomplished through:
- Formal owner readiness assessments and ratings as part of financing of capital construction projects.
- Research into project management theory as applied to large-scale construction projects,
- Expansion of Monte Carlo risk models to include consideration of fat-tailed risk distributions,
- Development of project control tools that assess the status and potential impacts on a project from broader externalities, including assumption tracking.
Owner readiness is an under-tested readiness area with potential for severe project schedule impacts. Ownerreadiness assessments can avert many schedule impacting behaviours. Owner readiness should assess readiness of associated decision frameworks and processes. It must confirm staff and support elements that support the project schedule. Articulation, agreement and communication of project objectives and criteria within owner’s team, affected stakeholders and principle designers, contractors and suppliers is similarly a key element of readiness with shortcomings here the number one reason large complex construction projects fail. Finally, owners must commit to sustaining their and the project team’s readiness.
There must be heightened recognition of the cost of delayed decision-making. The value of time must be clearly articulated. Recognize the principle schedule impacting causes of delay and put in place improved processes and mitigation measures to address timely decision-making by owner; changed owner performance requirements, by clearly defining fit for purpose; and delayed or withheld regulatory approvals. Project teams must recognize the value of schedule certainty to project owner (time to market, financing during construction, corporate cash flow). Strategies to better pull this lever of capital efficiency include:
- Formal owner-readiness assessments and ratings as part of financing of capital construction projects
- Require reference class forecasting in support of project financing and approval of developed project schedules to reduce optimism bias
- Project approvals to incorporate the value of a day of general delay to increase project team awareness of timely decisions and actions.
Turning to another lever of capital efficiency, capital cost, fit-for-purpose design must be re-emphasized as a guiding principle. Emphasis must be placed on needs vs wants. The developed design basis must meet owner’s project requirements (OPR), without undue contingencies, redundancies or factors of safety (reasonable design margins). Requirements must be challenged from a “scope control” perspective and subsequent reviews must not be unduly conservative. An expanded basis of design must be considered when developing a fit-for-purpose design. The traditional translation of owner’s project requirements into a basis of design must be expanded at the outset of the process to include construction and operations and maintenance (O&M) requirements. This must happen before design begins; it is not about constructability and operability and maintainability reviews. Fit-for-purpose execution processes and continuous performance improvement must be core operating parameters ensuring the level of design reflects the delivery form selected. We must challenge/simplify non-value adding process steps. A construction basis of design (CBOD) is the first element of an expanded basis of design. It drives down construction costs by ensuring that construction is an integral part of the basis of design with comprehensive identification of required or preferred construction strategies, tactics, techniques and tools to be incorporated in the construction process that influence project management and design. A CBOD identifies the construction labour, skills, equipment, materials of construction and logistical constraints to be reflected in basis of design and further actualizes CII Constructability Concepts I-1 and I-5. A CBOD can reduce a project’s footprint to minimize societal and environmental impacts while shrinking costs and recognize the need for supply chain strategies to be more tightly integrated into construction process through a common BIM.
Better performance of the CAPEX lever can be accomplished if we:
- Require reference class forecasting in support of project financing and approval of developed project estimates to reduce optimism bias and increase capital certainty
- Encourage migration from prescriptive to performancebased standards; put in place necessary education and validation and verification tools
- Carefully map the design basis to owner’s project requirements which in turn have been mapped to the project outcomes desired by the owner
- Strengthen the basis of design to encompass an expanded basis of design (BODX ) addressing construction (CBOD) and O&M (O&MBOD)
- Develop design scope guidelines outlining typical level of design detail required based on contract form
- Encourage performance-based or outcomes-based contracting that serves to encourage innovation.
A fourth lever of capital efficiency focuses on operating expenses of an asset’s lifetime. An operations and maintenance basis of design (O&M BOD), the second element of an expanded basis of design, provides comprehensive identification of required or preferred sustaining capital and maintenance strategies, tactics, techniques and tools to be incorporated in the operations and maintenance (O&M) process that influence design. O&M labour, skills, equipment, materials, including consumables and temporary provisions for maintenance are reflected in basis of design.
To effectively pull this lever of capital efficiency, Enterprise Asset Management (EAM) must be a core philosophy and practice to significantly reduce life cycle costs. Design-stage activities and information must feed a BIM system, intimately linked to an enterprise asset management insight article. ISO 55000 should be a core asset development consideration. Similarly, resilience must be an element of life cycle cost and enterprise asset management.
To improve the performance of the OPEX lever, it is recommended to:
- Develop a guidance document addressing scope and content of an operating and maintenance basis of design – Establish interoperability standards for BIM and Enterprise Asset Management systems
- Require compliance with ISO 55000 for large complex engineering and construction projects
- Develop a resilience standard incorporating a common resilience metric such as recovery time objective (RTO)
Alternative life cycle models such as public-private partnerships provide incentives and compensation for improved asset availability and should be used where this is of primary importance. System-level modelling must reflect multi-asset and multi-infrastructure needs and performance and address opportunities to share redundancies. Improving performance of this lever can be aided if we:
- Encourage use of performance based and outcomes based contracting
- Encourage systems-engineering education as part of engineering, project and construction management insight articles
Inventories represent non-productive capital and should be minimized to free up financial resources for productive investment and to improve performance of the existing asset base. Standardization of components and details of construction act to minimize inventory requirements. Tightly linked and robust supply chains allow inventories to effectively be carried by reliable suppliers.
Recommendations to enhance inventory contributions to capital efficiency include: – Expand standardization of components to include standardization at the assembly or module level – Migrate elements of construction into a manufacturing environment where such assemblies or modules are treated in a comparable way to other procured equipment – Expand integrated use of BIM models by project suppliers. Resolve intellectual property and tort risks
Premium pricing and finance
This seventh lever of capital efficiency demands that scarce resources and services be priced on a premium basis by asset owners. The value of time varies with time of day and demand levels. Premium services providing access to premium periods or premium priority should be value priced:
- Peak power
- Time of day tolling
- HOT lanes
- Congestion pricing
- Speed of service (data)
- Total resource consumed (data, VMT, water/power used)
Alternative financing must increasingly tap higher risk private capital and long-tenor financing such as available from pension funds. Alternative funding differs from financing, and must better capture the value of constructed assets through new funding sources.
Capital efficiency is enhanced if we:
- Create longer-term capital asset financing tools that mitigate risk exposure through asset performance covenants ensuring asset performance levels and state of good repair
- Establish financial industry standards on life cycle asset performance that extends across all asset forms – Require reporting of level of deferred maintenance
Operating philosophy and practices
The final lever of capital efficiency recognizes that reactive, proactive or predictive maintenance strategies affect life cycle performance, cost and affordability, and impact the basis of design. This can be offset by including greater awareness of operating-phase considerations into engineering curricula.
These guiding principles are intended to improve overall construction affordability and asset life cycle capital efficiency. The principles and recommendations have been structured along the lines of eight principal levers of capital efficiency and taken together they offer the potential for significant reduction in asset costs and life-cycle cost reduction.