Project cost blowouts plaguing miners: EY

DESPITE an industry-wide focus on cost-cutting and operational efficiency, massive budget overruns during the development of multibillion dollar projects continue to hamper productivity, according to figures from EY.
Project cost blowouts plaguing miners: EY Project cost blowouts plaguing miners: EY Project cost blowouts plaguing miners: EY Project cost blowouts plaguing miners: EY Project cost blowouts plaguing miners: EY


Jack McGinn

A new EY report providing insight into 108 projects in different commodities across the world with budgets greater than $US1 billion (A1.27 billion) found 69% of the projects were facing cost overruns.

Alarmingly, the average budget overrun on the projects assessed in the study was 62%. The projects have a combined capital investment of $367 billion.

In addition, 50% of projects were reporting delays even following the implementation of remedial acceleration initiatives.

EY Global Mining and Metals advisory leader Paul Mitchell said addressing capital productivity on large projects was especially crucial for companies in the current market cycle.

“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 to the next investment phase when projects are only going to be more complex with less margin for error,” he said.

Key areas which continue to contribute to cost blowouts were identified as project management, stakeholder conflict, resource constraints, regulatory and policy-related changes and unfavourable external environments.

EY said despite large investments into upfront planning on projects, certain areas were being overlooked or undervalued resulting in cost blowouts, including the flagging of emerging risks, adequate cost and time contingency and scenario planning.

The solution to budgetary problems as identified by EY revolves largely around planning, and includes increased stakeholder analysis and engagement strategies, and planning around a wider range of resource, regulatory and environmental constraints to mitigate their effect in practice.

Mitchell said while many of the factors which caused delays and blowouts may be considered out of the realm of control for mining companies, better planning resulted in greater control down the line.

“One of the key areas that CEOs and their teams have greater control over is the project management – more comprehensive front-end planning, greater rigor in cost and schedule estimates and better governance over contractor relationships will go a long way to driving improved predictability and control,” he said.

He said addressing capital productivity on development projects was crucial as the market for funding becomes more competitive and commodities prices leave less margins for error.

“Fewer projects means there is greater pressure on those who do proceed to deliver the gains in capital productivity and strategic outcomes which are required by boards and investors.”

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