How the Capital Stage Gate Process Can Maintain ROI

July 15, 2021
Front-end Planning
Detail Engineering & Design
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The capital project stage gate process is the approval process of a project that occurs prior to project execution. The stage gate process allows stakeholders to make informed decisions regarding investments and allows project owners to more accurately calculate ROI. The most common form of this process consists of three front-end planning (FEP) or front-end planning “gates”—FEP 1, FEP 2, and FEP 3. Each of the three gates must be passed before contractors may proceed to project execution, which involves everything from detailed design and engineering to construction. At each stage, a cost estimate for the project is provided. With progression from FEP 1 to FEP 3, the certainty of this estimate becomes stronger. 

The result of the stage gate process should be a strong scope definition and a highly accurate cost estimation. A properly executed stage gate process should result in improved time and cost efficiency for capital projects.

Below we examine each of the phases of the capital project stage gate process and how the process can be used to maintain your ROI. These gates can vary in desired client deliverables. 

Understanding the Capital Project Stage Gate Process 

One of the highest financial risks for capital projects is the failure to adequately define the scope at the beginning. Utilizing a strong and detailed stage gate process is critical to the success of capital projects and the ability to maintain ROI. Detailed below are three FEP stage gates that are commonly used in managing and delivering capital projects.

FEP 1: Opportunity Identification and Assessment

In the first front-end planning gate, the project owner presents the project plans, introduces the initial project scope, and establishes a cost estimate using a method such as factor estimation for the completion of the project. This cost estimate is a number that should not be exceeded during the project. The project owner also identifies any opportunities for reducing the cost estimate or increasing revenue, giving greater potential for not only maintaining ROI but improving it. If there is no opportunity for ROI in a capital project, the idea is often nixed and the project isn’t carried out. It’s important to note that this stage is primarily an assessment of the project and its potential cost, not the actual cost. Estimates at this stage are typically a Rough Order of Magnitude (ROM) at +/- 50%. 

If the FEP 1 stage receives approval, the project can move forward to FEP 2. 

FEP 2: Scope Development and Conceptual Engineering

In the second phase of the capital project stage gate process, the project scope is defined even further and conceptual designs are produced. The project owner also requests and receives price quotes for any materials and equipment that will be used during the course of the project, including in the engineering and construction phases. This helps the project owner more accurately determine the costs that will be incurred. 

The goal of the FEP 2 stage is to continue to develop the project scope while staying within the range of the initial cost estimate. Generally, if the estimate in FEP 2 is +/- 30% of the initial cost estimate, the project is approved to move forward to the next phase.

FEP 3: Execution Planning and Basic Engineering

The FEP 3 stage gate is also known as FEED—front-end engineering development or front-end engineering design—as well as basic engineering. In this phase, the preliminary designs from FEP 2 become more detailed with better quantities and better layouts. The project scope should be fully defined, and the cost estimate should be as detailed and finalized as possible. The goal of FEP 3 is to produce a final budget estimate that is +/- 10-15% of the initial cost estimate. This usually will enable the project owner and the stakeholders to proceed with full funding of the project.

At each gate, continuation is typically decided by the project owner. The decision is made based on forecasts and information available at the time, including the business case, risk analysis, and availability of necessary resources. Changes bring risk, delays, and increased cost.  It is important to make sure all stakeholders are aware of changes at all stages to help prevent and minimize risk.  

How the Capital Project Stage Gate Process Maintains Your ROI

The stage gate process is especially important for capital projects when a project owner needs a way to strictly control the costs, budget, and schedule of a project. In certain circumstances—when planning small-scale projects that require fewer materials and equipment for example—project owners can choose to skip stage gate phases because the risk of cost overruns is greatly reduced. However, if project stakeholders require due diligence in approving the cost of the project as it passes through each step, the stage gate process should be used to ensure cost certainty and maintain ROI.  

During phases FEP 1 and FEP 2, a series of value-improving practices can be implemented to help reduce potential costs that could diminish ROI. One way to maximize ROI at these early stages includes minimizing on-site construction. This can be achieved by applying different building methods such as using skids to move a finished structure from one site to another or utilizing the modularization method where the structure is built in a fabrication shop and then barged to the site. Using these methods can help bring down total costs because the cost of labor is generally more expensive when working in the field; site conditions can often be unpredictable due to climate; and chances for adverse weather and safety risks are usually higher. 

The capital stage gate process helps gather the right information at the right time to help project owners make informed decisions. It gives teams clear guidance for priorities and minimizes risks pertaining to finance, quality, safety, and the environment. Mitigating risks positively contributes to the project’s actual ROI.

Choosing the Right Contractor for Your Capital Project

At H+M Industrial EPC, we partner with you to ensure that you receive the most ROI from your capital project. From concept and creation to implementation, we work with you throughout all of the project stages to ensure your project is completed on time and within budget.

H+M Industrial EPC helps by leveraging our resources, experience, and industry knowledge to execute your capital project as effectively and efficiently as possible while using our EPC approach. While we manage the process, you are still in control, making critical decisions and guiding specifications. 

About the Author

Want to Learn More About Project Management?

To find out more about how the capital project stage gate process can improve your ROI and how H+M Industrial EPC can help, contact us today.

To find out more about the advantages and disadvantages of turnkey projects and how H+M Industrial EPC can meet your capital project needs, contact us through our website today.

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For over three decades, we have provided best-in-class capital project management services to Energy and Chemical industries through our proven EPC approach. We are dedicated to providing trust, experience, and efficiency through all stages of engineering, procurement, and construction--on budget and on time.

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