Capital expenditure (CapEx) approval process: Cut your losses before you spend millions

This year your organisation will spend millions on early-stage work for big projects that were never going to be implemented. Imagine you could discover which capital expenditure requests need to be cut earlier in development, reducing wastage of resources and allowing you to spend that time and money on other projects that deliver value.

Of the many capital projects rolling across executive desks for CapEx approval, some simply shouldn't be approved – for a multitude of reasons. Perhaps the project is too risky, the cost is prohibitive, or there isn't a market for the product any longer.

There might even be an easier, lower-cost solution to the problem being solved. Or, utilising excess capacity in another factory and modifying the supply chain network means that the entire project can be avoided while still achieving the same outcome.

“Portfolio performance is defined as much by what you don’t authorise as what does go ahead”

However, finding out if a project should be implemented often requires an initial capital expenditure request. Time and resources are needed to think about design and technology, develop cost estimates, assess risk, and test the market. Project managers can typically spend 3-5% of projected capital expenditure with limited approvals in the CapEx approval workflow.

So, for a $100 million project, it could take $4 million just to gather sufficient definition to enable capital approval. How do you make your $4 million a worthwhile investment?

If the project has final approval, it’s an easy answer. But if it doesn’t go ahead, that capital expenditure is essentially wasted. Decision makers want to see benefits from their investments. Having multiple approvals in the project process give strict guidelines around what requires final CapEx approval.


How development gates work in capital expenditure requests

Instead start by spending a small amount of money on sensing whether a capital project will fly. This is the purpose of development gates.

Implementing useful development gates can be a hurdle for companies that lack project management maturity therefore make them mandatory to ensure compliance.

We recommend starting by building an understanding around what happens at each gate, including who, and what level of development budget is subject to capex approval.

development phases

Without these checks and balances, project managers can end up using most of their development budget – potentially millions of dollars – when only a simple, and cheaper, feasibility study could have resulted in the same outcome.


Instil rigour and transparency around development gates

We often see development gates suggested on paper, but without the business processes or systems in place to support them, they aren't adopted widely. Organisations need to make development gates mandatory and track capex approval workflows to ensure project managers go through the right steps.

Project Lifecycle

These approval points in the project lifecycle support good governance and retain cash flow to spend on further developed projects. Ideally, there is a checklist of what needs to be reviewed at each gate – spanning topics from technology, commercials and strategy. This allows project sponsors and executives to drill down into each capex request to ensure the business case still makes sense.

Now you can establish ways of working where project managers undertake a robust lifecycle development process, recording assessment answers at each stage so project sponsors can approve the release of funds for the next development phase. With the right software solution, the CapEx process can be tailored to prompt project managers to think beyond the project, asking whether the problem can be solved by other means.

As a result, projects that should never proceed are usually identified and stopped at the first development gate. Executives are then empowered to make improved project portfolio decisions and spend only a fraction of the potential development budget – resulting in significant savings in time and money.

When you make people stop and think about what matters, asking the right questions, at the right time you can ensure thought goes into projects before millions are spent on progressing designs or a redundant capital asset.

This gives executives, project sponsors, and department heads the peace of mind that development funds are being spent wisely and capital investment is delivering optimised outcomes.

For more information on how CAPEXinsights can simplify your business processes and help you achieve your capital project and portfolio potential, please don’t hesitate to reach out to us