HOW TO DECIDE ON THE RIGHT PROJECTS FOR THE RIGHT REASONS FOR THE RIGHT COST
Abstract:Capital investment is one of the most important – and high consequence – decision processes an infrastructure-intensive organization faces. Because of the scale of investment typically involved, misdirection of funds can be very costly. A good capital investment decision process systematically addresses the core funding questions of “which projects?,” “at what level?,” and “when?,” while assisting the organization in striking a justifiable balance between capital and operations budgeting and between renewal and expansion demands. More fundamentally, a good capital investment decision process provides a comprehensive and rigorous decision framework against which these questions can be addressed – providing staff, policy-making body, and customer a high level of confidence in the outcomes of the key decisions involved.
Because of the substantial scale of capital programs over the life of a utility, capital programming is a rich source of potential economies to the utility. These economies can derive from the following:
Over-investment in non-mission critical related assets
Under-investment in mission critical assets
Imbalance among capital, maintenance, operation and renewal investment
Misdirected expenditures for repair versus renewal
Unnecessary or irrelevant levels and types of inventory materials and related expenses driven by non-standardized capital specification
Overspending on operations and maintenance to compensate for design shortcomings and misspecification
Overspending or underspending on risk management (business risk)
Mistiming investment (investing too early or too late) relative to the likelihood and consequence of failure
Revenue loss and dissatisfied customers and regulators due to performance failures and lack of system availability.
Good capital programming results from business processes that support key steps in the decision methodology. A body of “Best Practices” has evolved around the world that targets the Advanced Capital Program Evaluation Methodology. These key “Best Practice”-based steps in the Advanced Capital Program Evaluation Methodology are:
Appropriateness of levels of service targets
Current knowledge of asset performance and capabilities
Processes and capabilities of predicting asset failures
Accuracy of required timing projects
Accuracy/appropriateness of the cost of project elements
Processes used and capabilities of determining appropriate renewal strategies
Appropriateness of business case evaluation/prioritization process
Appropriateness of quality assurance processes followed
Resulting quality assessments
What, then, exactly are these “Best Practices” or quality elements relevant to capital programming? Parsons/GHD has categorized Advanced Capital Program Evaluation Methodology best practices into 13 major “Quality Components.” The following lists the 13 Quality Components assessed in this study:
Existing standards of service
Knowledge of existing assets/portfolio
Future demands/changes in Level of Service (LOS)
Prediction of failure mode
Timing of LOS failure
Consequence of LOS failure
Quality of proposed maintenance program
Appropriateness of recurrent budgets
Appropriateness of capital solution adopted
Assessment of capital cost estimates
Assessment of benefits
Appropriateness of economic evaluation processes
Note that the Parsons/GHD methodology assesses both the quality of the work process that leads to decision-making and the quality of the data/information available to the decision-maker to be used in the decision. High quality decisions result from high quality work processes coupled with high quality data. Decisions based on high quality processes and high quality data have a high probability of generating those outcomes that were anticipated by the decision-maker – leading to higher confidence in the quality of the decision. This critical relationship is depicted below:
No amount of excellent data can completely overcome poor work processes (failure to address the right questions) and, conversely, no amount of good work process can fully compensate for poor data.
The Parsons/GHD Advanced Capital Program Evaluation Methodology is designed to identify exactly where, for each project, improvements in confidence can be made through improvements in process and/or data relevant to that given project. Patterns emerging from across all projects can, of course, direct where organizational effort should be expended to improve organizational processes and data relevant to the agency-wide capital programming process.
Examples of methodology applied to the analysis of major CIP projects from the Orange County Sanitation District, California will be presented in the paper. Outcomes of the analysis and resulting benefits for the individual project and CIP program will be discussed.
Document Type: Research Article
Publication date: January 1, 2004
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