Capital Project Governance Setting up for Success

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www.pwc.com/ca

Capital Project

Governance

Setting up for Success

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PwC

Today’s presenter

Janet Rieksts-Alderman, CMA, CCSA

• PwC Canada (Toronto)

• Certified Management Accountant (CMA), CCSA, and Institute of Internal Auditors

• Working with Boards and Management to enhance governance, risk and control practices over their Capital Projects

• Led risk and compliance engagements for her mining clients operating in Canada, UK, US, Mexico, Central America, South America, Asia and Australia

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Our global team

Brian Gillespie Australia Carlos Biedermann Brazil Michel Grillot Canada Julian Smith

CEE & Russia

Hongbin Cong China Hansjorg Arnold Germany Sotiris Pagdadis India Guido Sirolli Italy Yumiko Noda Japan Francisco Ibanez Mexico Charles Lloyd Middle East Martin Blokland Netherlands Tim Nicolle Russia Andrew Chan

SEAPAN (inc. Malaysia)

Mark Rathbone Singapore Mark Ally South Africa Patricio de Antonio Lorenzo Spain Lars Tvede-Jensen Sweden Tony Poulter UK Peter Raymond US Peter Vickers France Vishal Agarwal Central Africa 27 November 2013 Capital Project Governance

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Agenda

Introductions

1. What’s at stake

2. Owner’s role in executing successful projects 3. Case Study – Managing Project Risk

4. Governance

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Overview of Capital Projects

Definition – A capital project is any undertaking which requires the use of notable

amounts of capital, both financial and labour, to undertake and complete. Capital projects are often defined by their large scale and large cost relative to other investments requiring less planning and resources.

Typical stages in a capital project in Mining (may vary from company to company; overlap between stages):

6 Scoping Scoping Study Feasibility & planning Pre Feasibility Study Feasibility Study Construction Contract Strategy Project Controls Schedule and Cost

Management Operational readiness Operations Extraction and Processing Asset Maintenance Support Services Closure Shut down Decommissioning Reclamation Post-Closure “Capital Project” November 26, 2013 Capital Project Governance

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Typical cost and revenue profile

Capital expenditures can peak during construction, therefore, right decisions

need to be made early on to ensure the right results are achieved in Mine

Operations.

Peak Spending

Capital Expenditures

Detailed Design

Design Develop Test Hand-over

Plan Operate &

maintain

Revenue

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Capital projects are integral to strategy

27 November 2013 8 Capital Project Governance

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Yet, more than 75% experience budget overruns

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If mismanaged, capital projects erode share value

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Across industries, loss in share value increases

steadily over time

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Smaller companies suffer larger losses

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Capital-intensive industries record the largest share

price erosion

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Capital project represent substantial risk

Thirty-seven percent of directors

believe there is no clear allocation of

specific responsibilities for

overseeing major risks among the

board and its committees.

37%

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Projects fail primarily due to managerial aspects.

Technical problems Suppliers’ failures

8 %

9 2 %

Inappropriate/inadequate resources Inadequate Project Environment Inadequate Planning/ Monitoring Lack of clear objectives

Directly related to managerial aspects

Directly related to technical aspects Lack of management (organizational) 4% 4% 10% 11% 15% 20% 36% Managerial aspects

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Technical aspects Cost overruns / schedule delays Ineffective Project governance, management & oversight Weak / ambiguous contract terms, misaligned incentives Unanticipated site conditions Imposed cash constraints / delayed payment Inexperienced management team Skilled labor availability Poor risk identification, management and response strategy Late design / poor project definition Inadequate communication / slow decision making Insufficient planning / poor estimating Poor project controls (cost & schedule)

Design errors and omissions leading to scope growth /

re-work

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Owner’s role in executing successful

projects

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A typical project organization is set up as follows:

Corporate Management Team

Project Management Team

EPC(M)

Sub-contractor

#1

Sub-contractor

#2

Sub-contractor

#3

Board of Directors

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PwC Capital Project oversight framework

• Provides a structured approach for management and boards to help with their oversight obligations, • Offers flexibility for industry specific needs or

special circumstances,

• Identifies key intervention points on complex projects to assess risk profile,

• Includes leading oversight practices to facilitate discussions with the CFO, project sponsors, management, or external stakeholders, and

• Identifies issues not currently on management’s or the board’s radar.

The framework is a six-step process that:

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1. Conduct a comprehensive assessment

• Determine how critical capital projects are to the company and the current state of its delivery capability

• Specifically assess:

- The importance of capital project to the business model; - Historic size and budgeted appropriations for such projects;

- Track record in terms of cost, schedule, and operational performance of previous capital projects; and

- The diversity of the company’s project portfolio and experience

- Organizational “risk appetite” – contract strategy, delivery options and required growth

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Sample Questions to ask project sponsors

• Are we ready? Assess maturity/readiness to advance to each stage. • Are we aligned? Are strategic goals aligned with tactical capabilities

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2. Get the right team to build the right approach

Agree on the board’s capital project oversight approach, including measures such as: • Bringing capital project experience onto the board and the owner’s team –

Dedicate one or more seats to someone with capital project delivery background such as a former construction company executive, a former project sponsor, or a director that was previously responsible for oversight of major capital project or reserve

committee. Identify deficiencies within your owner’s team and add team members if required.

• Use outside expertise – When project delivery capability as not a core competency seek the expertise of external consultants.

• Meet “Optimism Bias” with “Professional Skepticism”

Sample Question to ask project sponsors

• Does management have appropriate controls in place to provide timely and accurate status to the board - with verification?

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3. Prioritize

Identify the level of management and board involvement in key activities: • Capital investment planning (CIP);

• Project development and approval;

• Alignment of risk and control environment; • Contract strategy and selection criteria; • Project systems and reporting; and • Fraud prevention and detection

Sample Question to ask project sponsors

• Is the project execution team regularly evaluating how the project affects the corporate risk profile and reporting accordingly?

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4. Ensure project is aligned to company strategy

Align capital project activities with intervention and oversight by:

• Integrate mega-project lifecycle into the

management and board’s ongoing review of the company’s strategy

• The more critical capital projects are, the deeper management/Board should probe capital investment planning and ongoing projects to establish

accountability and the execution of an effective and consistent strategy

• When strategies change, it may be necessary to alter that capital investment plan and even suspend or cancel ongoing projects to efficiently allocate resources among the company’s often competing priorities

Sample Question to ask project sponsors

• Does management have appropriate controls in place to provide timely and accurate status to the board - with verification?

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5. Actively monitor and manage risk throughout

project.

“Hard-Wire” capital project delivery into risk management oversight by:

• Understanding external risk drivers stemming from market, labor, political, regulatory, and community conditions;

• Understanding internal risk drivers including optimism bias, execution readiness and capability, completeness of design, efficacy of reporting;

• Reviewing and testing key project information including: - Earned value management data;

- Status of high-priority risks;

- Sufficiency of remaining contingency funds; - Internal and external assurance activities; and - Disputes or potential claims with vendors.

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Sample Question to ask project sponsors • What are key external / internal risks?

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6. Actively monitor and improve the project;

incorporate lessons learned

• Adopt a continuous process and measure projects performance against business case (benefits realization)

• To assist in ongoing monitoring, directors may want to:

- Received regular updates on planned and ongoing capital projects to see if the strategy is being implemented effectively;

- Determine which key performance indicators (KPIs) and metrics they expect to receive from management;

- Stay on top of project performance through remote dashboards; - Use independent subject matter specialists from time to time; - Do a site tour!

- Regularly revisit the 5 preceding steps to gauge effectiveness

- Encourage discussions around lessons learned, ensure appropriate processes are improved.

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Actively manage and monitor the project starting with

three distinct lines of

defense

Execution (Project Management Team) • Implement policies and procedures

• Manage contracts and monitor vendor performance • Identify issues and risks

Oversight (Steering Committee)

• Empower management team

• Evaluate and question reported data

• Overview and participate in periodic risk management updates Assurance (Internal Audit / External Consultant)

• Periodically test project controls

• Trust but verify – establish a “no surprises” mentality

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A typical project organization is set up as follows:

EPC(M)

Sub-contractor

#1

Sub-contractor

#2

Sub-contractor

#3

Board of Directors

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Procedural framework and mining industry & country

specific risks

Planning Design Execution Testing Turn-over M & O

Project Governance Organizational framework, processes and procedures that provide the foundation for a successful project

Organization design and HR management

Project resource plan, organization, roles and responsibilities

Mobilize and manage

project labor Demobilization

Operations staff planning Ongoing requirements / skill review Procurement and contract management Contract strategy Contractor qualification and evaluation Contractor selection and negotiation Contract compliance review Trouble-shoot and punch-list Vendor qualification and selection

Scope and change management

Project definition of objectives and

scope

Detailed project design and scope

freeze

Change control Owner acceptance Asset change _management

Cost management Project estimate Project cost _baseline Cost control _{retention release}Final payment / M & O budgeting

Schedule management

Project schedule requirements

Project schedule

baseline Schedule management

Completion checklist Ongoing maintenance schedule Business systems and technology Project systems strategy Implement project

systems System support and maintenance

Transition to enterprise asset management

Risk and issue management

planning

Risk and issue tracking and resolution Confirm issue _resolution Ongoing issue _management

Communication, reporting and regulatory Stakeholder assessment and reporting requirements

Project status and

regulatory filings Project performance Asset performance Project close-out

Operations and financial reporting Safety management Safety management planning Safety training program

Safety trend tracking and incident investigation Commissioning interface plan Operations safety program 28

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1. Strategic Alignment – identifying options

Identification and selection criteria require project ranking and

prioritisation based on constraints and long-term strategy

Financial metrics Strategic alignment Risk Embedded value 27 November 2013

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2. Organization Capability

Everyone is part of ‘Governance’

Execution

Oversight Assurance

Project Sponsor

Project Director

Project

Controls Engineering Procurement

Owner’s Engineer

Consultants

EPC Vendor

Subcontractors

Fabricators _SuppliersMaterial Quality

Management Commissioning EHS Executive Steering Committee External schedule Advisory Board Construction 27 November 2013 30

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3. Procurement and Contracting

Risk

to

Con

tra

ctor

Design Bid Build (DBB) Design Build (DB)

Design Build Finance (DBF)

Design Build Finance Operate (DBFO)

Design Build Finance Operate Maintain Concession (BOO, BOOT)

Privatization

Procurement Strategy

Low High

Low

High

What is your contracting strategy?

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4. Governance Control and Technology

Scalable Governance / Delivery Models

Avoid a ‘One Size fits all’ approach

Mega Project

The mega project is an order of magnitude (or more) larger than the typical project for the organization.

One-Time Large or Very Large Project

Capital projects are not executed as a normal course of business and this is a single capital investment.

Schedule of Small and Medium Projects

The schedule involves a collection of projects for meeting a specific objective (e.g. growth or regulatory)

Capital Intensive Routine Projects

The asset base for the company requires steady capital investment to maintain production.

Margin OH/Risk Capex Feed/Opex $ Time Margin OH/Risk Capex Feed/Opex $ Time $ Time Margin OH/Risk Capex Feed/Opex $ Time Margin OH/Risk Capex Feed/Opex

Capital project delivery risk scenarios

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4. Scope, Schedule, Cost Management

Realistic pricing and contingency aligned with level of scope

definition

Class 5 0%-2% Class 4 1%-15% Project Definition 3%-5% Schematic Design 15%-20% Design Development 35%-45% Construction Documents 90%-100% Class 3 10%-40% Class 2 40%-70% Class 1 70%-100% Base Estimate

Adapted from the AACE Cost Estimate Classification System +15% -10% +20% -15% +30% -20% -30% +50% <+100% -50% 0% 100% Leve l o f Sco pe De fi ni tion 27 November 2013

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4. Scope, Schedule and Cost Management

Integrated Scheduling Processes

Group - high level schedule overview

Division - Level 1/2

schedules with some level of integration between projects Program/Region – Level 2 integrated schedules

Project – Detailed level 3-4 schedules (standard WBS coding)

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4. Scope, Schedule, Cost Management

Cost to Complete monitoring - Deliver what was promised

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5. Risk and Issues Management

Frequently Asked Questions

• How confident are you that we will complete this project on budget? • How have you identified, tracked and quantified risks and issues? • Is there sufficient budget contingency/unallocated provision? • Which risks are most likely to threaten success?

• What is mitigation and response strategy to each?

Quantitative risk assessments are attractive to leadership because they indicate a range of potential outcomes in terms of likelihood (probability) - not a single point – which is closer to reality

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5. Risk and Issues Management

Budget/Bid Strategy aligned with risk appetite and

market conditions

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6. Stakeholder Management

Identify Stakeholders Analyze Stakeholders Segment Stakeholders Develop Communication Strategy Prepare Communication Plan

Stakeholder Analysis Communication Strategy and Plan

• Identify individuals or groups that have an impact or will be impacted by the selection of an alternative funding method. • Assess stakeholders

across the following dimensions: Level of influence Level of impact Level of commitment Anticipated resistance • Segment stakeholders based on similar characteristics and current positioning across the dimensions of stakeholder influence / impact. • Develop a communications strategy to meet the changing informational needs of stakeholders over time. • Prepare a detailed communication plan that includes key messages, timing, frequency, and distribution methods.

Maximizing likelihood of success while reducing exposure to risks

associated with each stakeholder.

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Determine level of engagement, influence, and impact on the project.

- Communicate baseline and plan, and build relationship and trust

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A typical project organization is set up as follows:

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Project Management Team

EPC(M)

Sub-contractor

#1

Sub-contractor

#2

Sub-contractor

#3

Board of Directors

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First line of Defense

Execution (Project

Management Team)

• Implement policies

and procedures

• Manage contracts

and monitor vendor

performance

• Identify issues and

risks

Project Management Team

EPC(M)

Sub-contractor

#1

Sub-contractor

#2

Sub-contractor

#3

Board of Directors

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Second line of Defense

42

EPC(M)

Sub-contractor

#1

Sub-contractor

#2

Sub-contractor

#3

Board of Directors

Oversight (Steering

Committee)

• Empower

management team

• Evaluate and

question reported

data

• Overview and

participate in

periodic risk

management

updates

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Third line of defense

EPC(M)

Sub-contractor

#1

Sub-contractor

#2

Sub-contractor

#3

Board of Directors

Assurance

(Internal Audit /

External Consultant)

• Periodically test

• Trust but verify

• Establish a “no

surprises”

mentality

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CP&I – Selected thought leadership

Risk management and schedule management on mega-projects. Since your day-to-day business is construction, you know construction projects are inherently risky. Managing this risk is essential and, like any other important management or oversight function, is either done well or it is a wasted effort that can risk everything. Capital project owners have focused on improving governance structures; yet too many projects still fail to deliver on cost, schedule or quality commitments. The consequence of failure can be public embarrassment and disappointed stakeholders

Quantitative risk analysis. As major capital projects are subjected to greater regulatory and political scrutiny, the pressure on contractors to meet tight schedule and budgetary constraints increases. Often cost and schedule targets are reported without accounting for potential risks and impacts, which leads to an erosion of confidence in reaching those targets. Having a systematic quantitative risk analysis process in place to gauge the confidence level of the project’s cost and schedule is important for establishing realistic expectations.

Schedule analytics tools As capital project spend increases and aggressive deadlines are built into project schedules, the reliance on accurate, transparent and meaningful schedule practices is growing. Too often, major projects suffer from missed milestones, schedule slippage and delays with no way of determining recovery plans or realistic forecast completion dates.

Optimizing capital project delivery. A major US utility was finalizing its plans to construct new plants costing several billion dollars. Working in a highly regulated environment, the client recognized the importance of a strong control environment to manage the project. The client requested a

governance readiness review to determine whether its systems and controls could support a project of this magnitude and complexity.

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Questions ?

Janet Rieksts-Alderman, CMA, MBA, CCSA

416.687.8598

janet.a.rieksts-alderman@ca.pwc.com

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This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisers.