This is the first in a three part series about managing the long-term impact of COVID-19 on capital projects. The next installments of the series will address challenges in the supply chain and risks in contractual force majeure language.
Worldwide and industry wide, the COVID-19 crisis introduced protracted challenges to project execution. Managers of capital projects faced global uncertainty, changing project demands, and evolving safety concerns — and they had to overcome these new hurdles with few existing guidelines: It was a “learn as you go” experience, for all. For TritenIAG, supporting our clients’ projects throughout the crisis gave us the opportunity for various trial and error experiments. Two years in, we have learned a lot, identified some new best practices, and continue to look at strategies for managing the long-term impact of COVID-19 on capital projects.
Considerations while establishing a business case
Planning for impacts from COVID-19 should start early in the project lifecycle. To support business projections, owners need to integrate mitigation planning around schedule and cost outcomes as early as feasible.
A project’s overall timeline is vulnerable to COVID-19 related delays, which can impact the internal rate of return valuations. Congested supply chains, temporary loss of key people, changes in local regulations and guidelines, and difficulties traveling internationally can all negatively affect project timelines. Additionally, negotiations take longer. The current complexities are causing a delay in finalizing contracts with contractors or vendors.
To support business projections, owners need to integrate mitigation planning around schedule and cost outcomes as early as feasible.
Longer timelines have a carryover impact on the cost of investment, but mitigation planning can help keep an investment on track. For example, plan for lower productivity in the field and allocate budget for additional safety equipment and techniques. With regionally specific supply chain impacts, create a detailed plan for managing global and local price escalation. Exercise hedging options to lock in pricing and improve predictability for anticipated commodities. As price validation durations shrink, coordinate with vendors and contractors on a more direct award basis. What you may lose in a competitive price event, you may gain by improved deliveries that could yield the best project outcome.
Regularly review evolving COVID-19 requirements in project governance guidelines. Develop or reevaluate these guidelines and communicate these changes with project and executive oversight. Leverage these guidelines in proposals and contracts to set a foundation for managing the impacts of COVID-19.
Changed Risk Analysis
When managing any risk, robust planning and appropriate funding provides the most accurate case for determining ROI. Prepare a COVID-19 risk analysis separate from the overall project risk review to determine the appropriate additional funds necessary to manage the risk directly; this would include changes in field productivity, availability of craft, delayed shipment of critical path equipment, and other considerations.
Prepare a COVID-19 risk analysis separate from the overall project risk review to determine the appropriate additional funds necessary to manage the risk directly.
Vendors are requiring a higher percentage of cash up front to secure equipment and goods. This impacts project cash flow, especially when a high percentage of dollars goes to the purchase of equipment, modules, and pre-engineered buildings. Rather than hedging risk with delayed payment terms, leverage vendor's need for up front cash by negotiating an early cash payment discount. This risk can also be offset through additional financial vehicles such as letters of credit, bonds, and retention.
Currency Exchange Variation
Currency volatility has increased in frequency and intensity. Managers of large international projects should review the currency of their capital, especially if the commitments from those currencies are imminent. Again, look to hedge this risk if substantial enough to impact the project outcomes. Drive for payments in currency common to the project and lock in the values to withstand currency fluctuations.