Many major energy and natural resources projects, such as power plants, run 15% to 20% over budget, which could translate to about $1.5 billion in annual cost overruns for the average power, oil and gas, or mining company through 2030, Bain & Company consultants said Thursday in a research brief.
“That has serious ramifications for the world’s timeline to reach net-zero carbon emissions and for each company’s return on capital,” they said in Beyond the Stage Gate: Capital Projects in the Energy Transition.
Many companies are already addressing project challenges by resetting relationships with suppliers and making purchases more strategically, for example, the Bain consultants said.
However, the consultants for the Boston-based firm said companies should rethink how they manage their projects. The standard stage-gate process — which calls for making key project decisions at specific project milestones — has drawbacks that can hinder project development, according to the report.
“Stage gates create a rigid decision-making cadence that can delay critical decisions until a gate review, which may be too late,” the consultants said. “Or worse, some decisions never get made, simply due to scheduling conflicts among key stakeholders.”
Also, it can lead to project-by-project decision-making without a portfolio-wide perspective, according to the report. The typical stage-gate process can limit chances for improving engineering, procurement and scheduling across a project portfolio, the consultants said.
Some companies are enhancing their decision-making process by adopting three practices, according to the report.
First, some companies are viewing project development more holistically, which can “enable a more comprehensive understanding of all the potential challenges and synergies across projects, allowing the company to develop more cohesive and strategic plans to address them,” the consultants said.
Second, some companies are realigning operating models around critical decisions, according to the report.
“It’s imperative in this new environment to understand which decisions need to be made, when, by whom, and on what basis,” the Bain consultants said.
One U.S. electric utility cut the construction costs for a multiyear solar program by 15% by changing its operating model, including clarifying its decision-making processes and elevating program-level decisions to “the right” senior leaders, according to the report.
Third, the consultants called for using digital technology to eliminate waste and delays.
“Digital solutions, automation capabilities, and artificial intelligence tools have matured enough that they can deliver real and immediate efficiency gains for capital projects,” the consultants said.
AI and other advanced technologies can be used to process documents and invoices; identify quality flaws in engineering design documents; improve project schedules or equipment layouts; and monitor project metrics for risk signals, they said.
“Leadership teams that take a holistic view of their portfolio and reshape their stage-gate processes, operating model, and technology for this new era will be best positioned to deliver on and create returns from the challenging transition ahead,” the consultants said.
