How Owners can
Successfully Deal with
June 22, 2023
With so many projects around these days, we may sometimes wonder where all the money is coming from. A lot of projects are government-funded at the state or federal level, with the aim of improving the lifestyles of their constituents — whether this is new transport infrastructure, hospitals or even new cities or business hubs. However, outside of this, there are many other developments that are funded by asset owners themselves, occasionally with a percentage input from local governments.
Asset owners such as water and power utilities, mining and, more recently, the renewables industry, are constantly having to invest their money into new infrastructure to meet population demands. On top of this, they must also upgrade and maintain existing plant infrastructure to cope with local needs that may not allow for a completely new plant. This can be due to land restrictions or the need to support existing customers during refurbishments. How do these asset owners manage their budgets and what sort of delivery methods do they employ to meet this market demand?
Defining the Types of Asset Expenditures
Project expenditure types for asset owners are commonly broken down into three distinct areas:
- Capital Expenditures (CAPEX)
- Sustaining Capital Expenditures (SUSCAP)
- Operational Expenditures (OPEX)
Capital Expenditures are funding used by an asset owner to acquire, build, or upgrade physical assets such as buildings, process plants, or equipment. CAPEX is often used to fund new, major projects or invest in key acquisitions. CAPEX can include a major tank repair for an existing asset, purchasing a new piece of equipment, or building a new plant. CAPEX funding is utilized by asset owners to increase the scope of their operations, meet customer demand, or to add long term economic benefit to the organization, including growth.
Sustaining Capital Expenditures are funding used by an asset owner to effectively continue to operate at a status quo, maintaining existing capacity, or to make minor improvements to existing assets. This includes maintenance and investment required to adapt to any regulatory changes, which is something of major importance to power, water, and renewables industries as well as mining. The key difference here with SUSCAP is that it is not used for expansion of a plant or growth of the organization – that would be CAPEX.
Operational Expenditures are funding used by an asset owner to meet ongoing operational costs of running a plant. These include day-to-day, short-term expenses such as employee salaries, rent, utilities, etc. as well as repairs to plant and equipment. OPEX tends to recur consistently from year to year with minor changes based on new built assets, acquisitions, staff, etc. that become operational.
Who is Affected by Expenditures, and How Are the Related Projects Delivered?
All asset owners are affected by these expenditures and must plan for them year after year.
CAPEX tends to be the largest expense as this will be for major projects and will often be part of a Program of Works that will be let out to a delivery consortium. These programs are also planned in larger chunks, in that they can be for 5, 7 or even 10 years. This engages all parties for the longer term, guarantees work, locks in the pricing, and allows for better delivery planning over an extended term. However, these programs are often updated with new projects that weren’t planned for at the initiation stage.
SUSCAP may be planned as part of a program depending on the organization, new regulations and what level of sustainability is required for the existing assets.
OPEX, being the short-term planning expense, is generally set on an annual basis. Asset owners have to take into consideration any new acquisitions or plant maintenance requirements and expected repairs when setting this budget. It is a more complex budget to plan for as unexpected repairs will always occur.
Asset owners often try to deliver projects differently, based on the expenditure type; especially when it comes to software platforms, who should own them and how asset information is packaged at the end.
Major capital projects, as part of a program, are often left to the delivery partners to decide how to manage them and what software to use. Some common challenges I have seen here are:
- Assuming the Joint Venture (JV) or alliance partners can agree on platforms to use, the deliverables returned to the asset owner upon practical completion may not be compatible with existing systems.
- Systems that consultants and contractors need to use for a project are not necessarily the same as what an asset owner will need.
- Visibility of information to an asset owner from the delivery partners can be difficult to agree on. Each part of the delivery group from designer to construction to owner are looking for specific types of information but also don’t necessarily want each other to see everything. This means that an asset owner using a contractor’s software platform will only see what the contractor wants them to see.
- And finally, there is the future auditability of decisions around the project.
Sustaining capital projects, once an asset has been in existence for a while, tends to be delivered utilizing contractor software systems. This is highly dependent on the type of contractor, responsibilities or even whether the asset owner is delivering the project themselves. If the owner is responsible, they will tend to buy their own as a short-term measure or try to adapt what they already have. Either of these options inevitably causes challenges.
Once the asset is in operations phase, there are constant changes and updates to equipment, etc. so a drawing or document is never really ‘locked away.’ These asset documents are in a constant state of ‘potential flux’ so need to reside in a repository — whether this is an EDMS (Engineering Document Management System) or a record keeping system such as a CRM. The challenge here is that a CRM isn’t really the right spot for these sorts of artefacts, and a local EDMS means that there are two when projects are running — the owner asset version and a contractor project version. Maintenance contractor systems are also sometimes used to manage this phase, but the asset owner can lose control of the files and IP (Intellectual Property).
The best way for an asset owner to get around these challenges is to own the entire software delivery platform, inviting contractors and designers to use it as required. There is likely to still be segregation at a CDE level: designers for work in progress, contractors for construction and the owner for final deliverables and approvals. But the owner system should be the single source of truth for delivery with an audit trail for future reference. Contractors and consultants may use their own platforms as part of their delivery and sub-contractor control downstream, also considering contractual obligations.
If we consider that major projects start at the CAPEX stage, then move into a mixture of SUSCAP and OPEX, how good would it be for an asset owner to continue the use of a software platform through all the phases? One that they own from start to finish. One that contains the Digital Thread of an asset from concept, into construction, commissioning, and operations until it is retired.
Streamlining Project Delivery and Handover
We often see owners taking deliverables from consortiums at the CAPEX stage, trying to fit them into their own systems that aren’t really designed for this use, then move everything around again to perform SUSCAP work or operational updates. Transferring this data between different systems during the life cycle of an asset can lead to incompatibility issues, lack of control, lack of full auditability and the potential of losing the single source of truth.
Another consideration here is the ‘project handover’ challenge. If the asset owner has a system, project deliverables can be updated during the build, during upgrades or during operational changes. The owner knows exactly where things are up to, can do their own reporting and knows what deliverables are expected. They can even start thinking about how all this will tie into an Asset Management System – considering asset tags, related metadata fields, etc.
An integrated software platform offers asset owners a centralized view of their entire asset portfolio, including SUSCAP, CAPEX, and OPEX data. This visibility enables informed decision-making based on comprehensive insights into asset performance, financial viability, and sustainability metrics. By having real-time access to critical information, asset owners can optimize their investments, prioritize sustainability initiatives, and align capital expenditure with long-term business goals.
This can help asset owners mitigate risks and ensure compliance with regulatory requirements. It enables robust financial forecasting, risk analysis and scenario modelling to assess the potential impacts of investments on cash flow, profitability, and sustainability goals.
Integrated software platforms simplify reporting processes by automating data collection and analysis across SUSCAP, CAPEX, and OPEX. Asset owners can generate comprehensive reports, including financial performance, sustainability metrics, and operational insights.
Ready to take a deeper dive? Schedule a one-on-one consultation to find out how InEight can help you succeed in your project asset expenditure journey.
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