Like crafting a signature red blend, creating a budget for a capital project can sometimes feel like a cross between guesswork, sorcery and luck. As any project management expert will explain, there is no black magic involved. Instead, budgeting for a capital project requires insight, forward thinking, and an attention to detail.
Projects begin with a business need and a goal for fulfilling it. “We want to achieve X by improving Y.” This is where budgeting begins. A budget sizes up the opportunity and creates a starting point for what is affordable. This sets the stage for what capital equipment purchases can be justified.
Once identified, the project requirements should guide the selection of equipment. It should be a straightforward exercise to figure out how much that equipment will cost. However, capital project expenses include more than just the price tag of the equipment. Other considerations contribute to the final cost.
To determine these costs, most project managers will then ask the following questions:
1. What facility modifications are needed?
It might seem obvious that additional space is needed to house new equipment, but the impacts of integrating the new space and equipment may not be apparent. Will plumbing need to be rerouted? Is there enough electrical service? Is new fire-safety equipment needed? Does the floorplan need to be modified? Will equipment fit through existing doors (don’t laugh) and, is specialized machinery required for installation?
2. Does your in-house staff have the expertise and bandwidth?
During the project, additional engineering resources may be needed for implementation. Your staff may or may not have has the technical expertise to run the project. Will an added project take too much time away from performing “their day job”? You don’t want to see quality or performance suffer in the daily operations that facilitate your growth.
3. How do we minimize disruption of current production?
While it may be feasible to integrate new equipment without disrupting ongoing production, it isn’t likely. However, it is feasible to minimize downtime through planning. Facility modifications can be accomplished in advance during planned shutdowns and, with planning, multiple procedures can be completed during each shut down period. Either way, the costs associated with bringing in staff or mobilizing contractors for shutdown work is rightfully a project cost.
During the project planning phase, capturing all budget items is a vital part of the process. Asking the right questions up front can ensure a project stays on budget and still includes all of features that allow it to meet its long-term expectations.
When a capital improvement project overruns its budget, a winery is left with a difficult decision. They can abandon the original plan and reduce scope. This means that anticipated production improvements are downgraded, and the project will likely not achieve its justification. They can go back to management, owners, or investors to request additional funds. Both options also lead to erosion of trust with key stakeholders making it harder to get projects approved in the future. So, it is critical to get the budget right before the design process begins or the first piece of equipment is purchased.
In budgeting for a capital project (and we can’t stress this enough) unforeseen costs can push projects over budget. Typically, the costs are less “unforeseen” and more “overlooked.” Carefully examining a project plan and asking key questions early in the process can ensure a project stays on budget with no luck required.
Stay tuned – in our next blog, we will address some hidden “budget buster” costs that are all-too-often overlooked.
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