FY360° | Why capital expenditures need more CFO attention

It’s no secret that cost overruns and delays run rampant in large capital projects. Research points the finger at decision biases, which often play an important role in skewing the forecasting of costs and timing as projects are being planned. But a lack of internal discipline, in both the proposal and management stages of a project, further raises costs—both of individual projects and entire portfolios of investment.

It’s a drain on the bottom line even when times are good, but it also leaves companies less prepared for capital constraints prompted by external events such as the recent swoon in oil prices. By our reckoning, for example, energy and petroleum companies have already had to trim between 20 and 50 percent off their current year’s capital budget over last year. And when the capital budget consumes around two-thirds of cash flows, as it does in upstream oil and gas, cuts of that magnitude can force companies into painful trade-offs between cutting exploration, which imperils future growth, and reducing existing production at the risk of cash shortfalls and liquidity issues. Such decisions are especially difficult when projects can’t be easily compared, when managers resist change to their budgets, and when efforts to review them are ad hoc…

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