PERTH (miningweekly.com) – New research by EY has found that despite the significant cost cutting in the resources sector globally, multibillion-dollar projects were still plagued by cost overruns.
In its ‘Opportunities to Enhance Capital Productivity’ report, EY found that an average budget overrun of 62% was reported on the 108 megaprojects investigated. The projects considered were at various stages across the investment and project delivery life-cycle, geographically diverse and related to the development of copper, iron-ore, gold, coal, nickel and other commodities. Cumulatively, the projects analysed represented global investment of $367-billion, with each individual project exceeding $1-billion.
EY’s analysis found that the majority of these projects were over budget and/or delayed when measured against the initial estimates made during the early stages of the project life-cycle, such that 69% of the projects were facing cost overruns with an average cost overrun of 62% above initial estimates.
Furthermore, an estimated 50% of projects were reporting schedule delays even after remedial acceleration initiatives had been applied.
The report, released earlier this month, identified five key areas causing the problem, including project management factors, stakeholder conflicts, resource constraints, regulatory and policy-related challenges, and an unfavorable external environment.
EY global mining and metals advisory leader Paul Mitchell said that one of the key areas that CEOs and their teams had greater control over was project management. He said that more comprehensive front-end planning, greater rigour in cost and schedule estimates and better governance over contractor relationships would go a long way to driving improved predictability and control.
He added that competition for capital project funding within mining organisations was fiercer than ever, and a combination of low commodity prices, more complex projects and higher hurdle rates was leaving less margin for error.
“Fewer projects means there is greater pressure on those that do proceed to deliver the gains in capital productivity and strategic outcomes which are required by boards and investors.”
Mitchell noted the risk of overruns was driving many mining companies to challenge the way projects were traditionally run.
“With the productivity of invested capital a key issue for CEOs, there is an imperative to address the multiple factors behind the total cost of completion, particularly with an eye on the next investment phase when projects are only going to be more complex with less margin for error.”
Despite significantly less capital being allocated to projects, with total capital expenditure having dropped from $142-billion in 2012 to an estimated $96-billion this year, development continued because of the long lead times for projects approved during the super-cycle, and the need to prepare the next wave of supply to be available as the cyclical upswing inevitably occurs, EY said.