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Risk Trends in 2024 and Beyond: Capital Projects and Operations

Risk Trends in 2024 and Beyond: Capital Projects and Operations

Synopsis
4 Minute Read

Capital projects are inherently expensive and carry a high risk of cost overruns. The mere expectation that these overruns will occur can further inflate costs and lead to project mismanagement.

Still, inflated costs are not the only risk associated with capital projects. Quality issues can compromise the health and safety of employees and contractors, leading to even more costly downtime and unexpected maintenance.

Organizations need to incorporate rigorous risk assessments into large capital initiatives to identify design flaws, anticipate potential issues, and identify safety and environmental concerns. Appropriate project management can also ensure that timelines, materials, and costs align with expectations and that work meets the expected standard.

Partner, National Leader - Internal Audit
Consulting Leader, Energy and Utilities
This insight is one of 15 risks in our 2024 Risk Trends Report. Navigate back to the main page for the full list of risk trends that you should be monitoring for in the year ahead.

Are your projects being managed to mitigate the risk of budget overruns, extended timelines, and poor quality?

Capital projects are some of the most expensive investments a company will ever make. These can range in the billions of dollars and typically carry a high risk of cost overruns, especially with inflationary pressures on labour and materials.

The expectation that capital projects almost always come in over budget can, itself, lead organizations to pay far more — and take on more risk — than necessary.

One reason is that most capital projects see some error in billing. It is common for a project to inflate by one to three percent due to erroneous billing. That could mean up to $30 million on a billion-dollar project. Organizations embarking on capital projects can mitigate the risk of overpaying through the targeted use of data analytics to compare invoices and requisitions to identify inconsistencies. They could then use this data to collect back when overbilled or defend their case in court.

Other risks associated with capital projects include quality issues, which can compromise the health and safety of employees and contractors, leading to costly downtime and unexpected maintenance. Addressing these issues before construction starts is the most effective way to protect people, an organization’s reputation, as well as its bottom line.

Aside from the typical design, budgeting, and tendering proposals for capital projects, appropriate project management can help to ensure that timelines, materials, and costs all align with expectations. This function should be accountable for inspections and status updates throughout the project lifecycle to validate that the work is being performed as agreed, complies with relevant standards, and meets the specifications set out in engineering plans.

It is also critical that the initiative go through a rigorous risk assessment as part of the planning process. This lens can help to identify flaws in the design, anticipate how delays and overruns will impact the business, and identify potential project management issues — including risks to safety and the environment.

Related risks

  • Budget overruns and timeline delays
  • Vendors who are not qualified to perform the work as required
  • Poorly designed vendor contracts
  • Health and safety incidents
  • Vendor billing issues
  • Quality concerns

"" Key questions to ask

  • Does your organization have the requisite experience to manage large-scale capital projects? If not, how will it resource the expertise required to deliver the project successfully?
  • How will you monitor the timely delivery of the project, ensuring it remains on budget?
  • Have clear roles and responsibilities for both project delivery and project oversight been established?
  • Are there unique design and implementation elements with this project, or is this something the engineering, procurement, and construction firm has done before?
  • Are the vendor contracts set up as fixed fee, or will they be time and materials? Do you have the contract set up with a right-to-audit clause and a defined dispute-resolution process?

"" Red Flags

  • Onsite health and safety issues
  • Vendor billing errors
  • Regulatory non-compliance instances
  • Legal issues
  • Material cost overruns
  • Timeline extensions
  • Engineering, procurement, and construction resource turnover

Internal Audit Project Opportunities

Capital Expenditure Audit
This audit examines the organization's capital expenditure process to ensure that investments are aligned with strategic objectives, adequately planned, and appropriately authorized.
Project Management Audit
This audit reviews the organization's project management practices, including planning, execution, monitoring, and control of capital projects, to identify potential risks and areas for improvement.
Cost Control and Cost Estimation Audit
This audit assesses the accuracy and reliability of cost estimates for capital projects and examines cost control measures to identify cost overruns and deviations.
Contract Management Audit
This audit evaluates the organization's contract management processes for capital projects, ensuring compliance with contract terms and conditions and verifying that vendors and contractors deliver as per agreements.
Schedule Compliance Audit
This audit examines the adherence to project schedules and timelines to identify delays and potential impacts on project outcomes.
Quality Assurance and Quality Control Audit
This audit reviews the organization's quality assurance and control processes for capital projects to ensure that deliverables meet established standards.
Procurement and Vendor Audit
This audit assesses the organization's procurement practices, vendor selection, and performance evaluation to ensure transparency and compliance with procurement policies.
Health, Safety, and Environment (HSE) Audit
This audit evaluates the organization's HSE practices during capital projects to identify potential risks and ensure compliance with safety regulations and environmental standards.
Resource Allocation and Utilization Audit
This audit examines the allocation and utilization of resources, including labour and equipment, to ensure efficient use during capital projects.
Change Order and Variance Analysis Audit
This audit reviews change orders and variance analysis for capital projects to assess the impact on project budgets and schedules.
Internal Controls Audit
This audit assesses the effectiveness of internal controls to manage risks related to capital projects and operations.
Compliance with Regulatory and Legal Requirements Audit
This audit ensures that capital projects and operations comply with relevant regulatory and legal requirements, permits, and licenses.
Asset Management Audit
This audit examines asset management practices, including maintenance and disposal strategies, to optimize the life cycle of capital assets.
Data and Documentation Management Audit
This audit assesses the organization's data and documentation management related to capital projects and operations to ensure the accuracy and accessibility of information.
Project Closure and Lessons Learned Audit
This audit reviews the closure of capital projects and analyzes lessons learned to identify best practices and areas for improvement in future projects.

Risk Trends in 2024 and Beyond

View all the risk areas featured in this year’s report. 

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