As mentioned in our previous post on budgeting for your Capital Project, it is often thought that “unforeseen” costs inevitably push projects over budget. However, the costs are typically less “unforeseen” and more “overlooked.” Examining a project budget and asking key questions early in the process can ensure a project stays on track.
Many of these hidden expense fall into one of five categories: travel, training, testing, spare parts and regulatory compliance.
Each phase of the project should be scrutinized to ensure expenses falling into these categories are not overlooked. Furthermore, each should be captured under its own budgetary line item. And finally, at the end of the process, it is imperative to include budgetary contingency to manage risks.
Travel
Scouting out new equipment requires traveling to multiple vendors; often internationally. That means a potential for multiple trips before a quote is even requested. Once a piece of equipment is selected, additional travel will be necessary to kick off the project, work out and update designs, inspect equipment and perform acceptance testing. As much as we rely on electronics in the digital world, face-to-face is still the best method of communication in many instances and there is no substitute for seeing machinery firsthand. Travel is also not limited to the project manager or lead. It should include operations, maintenance, and quality personnel, as well as engineering and other key stakeholders.
Training
Early in a project, determine who will need to be trained and whether training will be conducted at the vendor’s factory, on your own site or both. Figure that managers and line operators will need to receive training; not just production leads. Vendors do not always include travel and training fees in their quotes. They also do not always include training aids and documentation in those fees. Keep in mind, a custom piece of equipment may require the vendor to create custom materials at an additional cost.
Spare Parts
It is hard to imagine having to replace parts on equipment before the project even begins, but the reality is that parts break and machinery wears. Many startups have been delayed for lack of a seemingly simple widget. Although future supplies will likely be rolled into operating costs, it is important to make sure that an initial set of spare parts is on hand when the equipment arrives. Accountants may have something to say about whether the initial stock of spare parts is expensed or capitalized, but they need to be accounted for and not pushed off until the next budget cycle.
Testing
Before the equipment arrives at your site, it will be operated at the vendor’s facility for initial setup, debugging, and for Factory Acceptance Testing (FAT). Most vendors provide for an FAT in their quotes. Be sure that their idea of what constitutes a satisfactory level of testing matches yours. Staffing over and above the vendor’s allowance will come at a cost. The same applies after installation at your site.
A substantial amount of production-quality materials, as well as their corresponding shipping and disposal costs, are needed for on-site testing and debugging. These costs can add up quickly and are one of the most overlooked and underestimated. In addition, initial testing and debugging may require running maximum load, cycling and extended break-in periods. So it is important to consider energy and water consumption during testing. A vendor can provide initial estimates, but it pays to make sure everyone agrees on what testing must be performed and how long it will take.
Regulatory Compliance
Sometimes costs associated with atypical regulatory requirements get left out of the budget. For example, in earthquake prone California, seismic evaluation and anchoring is required for fixed equipment that weighs more than 700-lbs. The evaluation and design of custom parts may be a substantial cost that will require the services of a registered structural engineer.
Getting familiar with your municipalities unique regulatory requirements is also key to staying ahead of unexpected regulatory fees. For example, some municipalities require UL rated electrical cabinets. If a vendor is not suitably qualified, third-party certification may be needed before operation can begin.
Of course, unexpected things always pop up, which is why a properly prepared budget includes a line for contingency. Contingency is a reserve of money that is not allocated to a particular part of the budget. The assumption is that the contingency will be spent – it’s just not clear on what. The size of the contingency is based on risk levels which may lead to scheduling delays or acceleration, scope adjustments, or other extraordinary events. Contingency is typically calculated as a percentage of the total budget. It is unrealistic to apply a 0% contingency by assuming all eventualities can be predicted.
Ultimately, creating a budget is less a work of art and more a product of experience and expertise. PAMC specializes in project management. Our experience can help provide insight and guidance from budgeting through project completion.
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