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Week of 3 January 2022: How to manage your capital budget this year

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Most of the people I talk to today have not prepared or managed capital budgets under the conditions we find ourselves in now. Well, I saw my first capital budget in an industrial setting in March of 1970. Perhaps I can help you a bit--we had similar issues back then as those we are facing today--the administration in the White House in those days thought they could control inflation with price controls which caused me to miss two planned 25 cent raises as a co-op student, from $2.75 per hour, to $3.00 per hour to $3.25/hour, over a period of 18 months. Glad I could do my part to help tame inflation; as a student operating on the pay as you go plan (no loans), one makes too much money anyway.

I digress. The objective in a project budget may be to isolate the budget from the craziness going on around you. This has been going on forever. For instance, even up until today, in countries with stability issues, budgets must be managed, too. In those cases, you build a budget as you normally would, then you have a line item that is "country risk." "Country Risk" allows one to separate the risk of working in Outer Slobovia with its tin hat dictator from the expected costs of a "normal" project in a predictable locale.

We do the same with inflation, for the same reasons. Should you find yourself in a time and place where those in charge of fiduciary policy don't seem to know the tried-and-true ways to control inflation (hint--it is not price controls), you add a line to your budget called escalation. The beauty for the project manager and project engineers is this--this line is the purview of your financial department; they are supposed to study the tea leaves (and the Wall Street Journal) and tell you how much inflation is going to be and when. This is not within the expertise of the engineers, although they may be consulted on their insight in a particular area; it really belongs to the financial types. Now the board of directors is not going to be happy with the uncertainty it infuses in the totality of the budget, but at least we have the responsibility in the right place--that little line called "escalation."

The other problem today is delivery. Unfortunately, the engineers, and their associates in purchasing, are likely going to have to hit this one without much help. Today, the words "force majeure" are no longer fancy French legalese inserted in all contracts. They can sting in time, money or both. This means you must dig deeply into the workings of your key suppliers; you must get past the person in the plaid pants who thinks its cool to wear spats and whose solution for everything is to take you to dinner. Peel the onion until you get to the grumpy, hard-hitting managers within their organization.

You are going to have to dig into the fine print before you sign any contract. You are going to have to be as specific as you can be as to what "force majeure" means in each specific contract. You will need expediting rights in the workshops of your suppliers. Likely you will be asking for weekly shop production schedule updates and then the same for shipping. This is not a one size fits all exercise and it is not just the big dollar items. Look at the automobile manufacturers waiting for relatively small dollar computer chips.

I have had a lot of experience expediting. Sometimes I got what my company wanted, sometimes I didn't and for some unexpected reasons at times. At one time it was because there literally were not any milling machines to cut slotted screen baskets--those in the workshops were working 24/7. In another case, I made a trip to north central Sweden to get some vital parts for a rebuild. The shop was weeks behind and they were not working overtime. I sat down with the management, wearing all the coats I owned, and asked the obvious question: "Why aren't you working overtime?" The response was a condescending explanation that their employees valued their time off, and, by the way, the tax rate was 75% on wages, so no one was willing to trade their Saturdays for such a meager return. Shockingly, I understood.

But there is a lesson in this... we did get our equipment on time because the workshop pushed other orders aside for they sure did not want me to visit them again. Squeaky wheel gets the grease.

Be safe and we will talk next week.


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