76 – Creative ways to make your capital expenditure target. Some ideas.

Posted by Whistler                                                                          570 words

capital expenditure graph

Yes, it is that time of the year when our engineers and accountants become highly creative.   By June 30 they will need to explain whether or not the targeted amount of capital works has been completed. Often the target is expressed as simply as ‘90% capital program completed’. Usually it is a KPI for the CEO and senior managers. That makes it an important target.

So, why the need for such high levels of creativity?

Delivering 90% of the planned capital works is harder than it sounds. Many councils would have averaged around 60% to 70% over the last ten years. This is partially explained by growth in capital expenditure that has exceeded the organisational capacity to deliver. Another part of the explanation is that capital works programs have become more diverse with more people participating in the planning and delivery across the council. As a result, projects have become more complex and people with inadequate project management skills are often involved.   Finally, councillors have become much more involved and the capital works program will now have projects that councillors, sometimes in response to community submissions to the budget process, have included – often at the last minute.

As the capital works program has grown, become more complex, involved more people with less skills, and started to include projects without adequate pre-planning or feasibility analysis, especially if they require community engagement, it has become much more difficult to deliver the whole program. But the target remains.

This is where the creativity occurs. Everyone involved really wants the target to be achieved. There are just too many recriminations when it isn’t. Not delivering the capital works program stands as a tangible and unavoidable example of organisational failure. So, how do people get creative?

It usually starts with redefining the ‘90% capital program completed’. Is it 90% by dollars expended or actual percentage of works completed for each project on the ground or the number of projects completed? Usually the numbers are run on each to see which is closer. Some councils are a wake up to this so they have said it is dollars expended.

This leads to redefining the amount to be expended. Is it the budget (as set at the start of the year), or the forecasts (revised estimates of expenditure made during the year) or the amount funded from rates (less grants or funding from other sources). Again the numbers are usually done for each using the figures calculated for each of the ‘works completed’ options.

The final step is usually to look at the financial records of expenditure. Will the figure used be the amount paid to suppliers (i.e. work has been done and invoices presented and paid) or that amount plus any committals to pay suppliers (i.e. committed in that accounting period but to be paid in the next) or that amount plus any amounts not committed but requested to be ‘carried forward’ (i.e. you expect to spend them on the project in the next accounting period).

My favourite solution is a suggestion from an engineer some years ago. He thought expressing the target dollar value for the capital works program in $US and the actual expenditure in $AUD would solve the problem. Everyone thought he was joking. He obviously missed his vocation.

In the end, you only need one 90% to get the CEO off the hook for committing to something that the organisation had no capacity to deliver.  Have a go yourself using the example below. See how many combinations give you 90% completion.

capital example

(eerhT si eht rewsna fi ouy esu DUA$)

Advertisements