Strategic Planning : The best way to
manage EPC Contract Risks
Pankaj K Sinha
Abu Dhabi
17th Nov 2014
Risks in the EPC Contracting Process
1. Project risk is an uncertain event or condition
that, if it occurs, has a positive or negative
effect on one or more project objectives such as
scope, schedule, cost, and quality. : PMBOK
Guide
2. Risk shall be managed, minimized, shared,
transferred or accepted.
3. Appropriate and equitable allocation of a risk
from early project life cycle is essential in all
contractual arrangements to capitalize on them.
2
Risk Build Up and Time
Stage 4
Stage 3
Stage 2
Stage 1
FEED
EPC
Operation
Feasibility
Study
Stage 1
Business case
Risk Workshop
Stakeholders’ input
Execution Strategy
Stage 2
Design
EPC PQ
Risk Workshop
Term Sheet
Pre-bid conference
RFP
Stage 3
Risk Workshop
Bidding & Contract
Detailed Design
Procurement
Construction
Commissioning
3
Risks Allocation in the Contracting Process
•
The
contracting
environment
is
competitive
and
EPC
scopes are complex.
•
Often risk allocation is
through “aversion”
•
Inappropriate entities are
often burdened with risks
they can’t manage or
survive.
•
Strategy for appropriate
allocation of risks is very
important for success for a
project.
Owner
Contractor
Subcontractor
4
Risk- Industry Standards & References
• ISO 31000:2009
Risk management Principles and guidelines
• A Guide to the Project Management Body
of Knowledge (PMBOK® Guide) - PMI
(ANSI/PMI 99-001-2013)
• Practice Standard
Management - PMI
for
Project
Risk
• BS 6079-3:2000: Project management.
Guide to the management of business
related project risk
• International Project Risk Assessment
(IPRA) – CII
• AACE RP No. 62R-11 : Risk assessment:
identification & qualitative analysis
5
Potential IPRA Application Points
Program
Decision
Pre-Project
Planning
Primary
Engineering
& Design
Construction
Operations
Secondary
= Potential application points
6
Risk Management Strategy for EPC Contracts
1.
Risk Register as input from Risk Workshop.
2.
Finalize bidding strategy. EPC Contractor takes the major risks
relating to the Cost , Schedule & Quality
3.
Identify risk that can be allocated or transferred to relevant parties
and develop a risk matrix
4.
Contemplates factors that may diminish the practical effect of the
intended risk allocation in the contractual arrangement.
5.
Refine the Risk Matrix and identify relevant parties.
6.
Develop contract provisions and insurance regimes
7.
Execute contract and administer for successful project delivery.
7
Hot Button Risks (Typical)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Site Conditions
Joint & several responsibility
Review and approvals
Liquidated Damages for Delay & Performance
Indemnity
Insurance Allocation
Force Majeure
Change Management
Nominated Subcontractors
Design Responsibility
Change in Law/Specifications/Regulations
Standard of Care
Performance and Acceptance Criteria
Dispute Resolution
Risk Workshop
Stakeholders’ input
on risks/due
diligence
Bid Package
Contract
8
Risk Allocation Matrix
Risk
Brief
Details
Risk
probability
Mitigation
Measures
Contractor
Owner
Insurance
Site Conditions
Joint & several
responsibility
Review and
approvals
Liquidated
Damages for
Delay &
Performance
Indemnity
Insurance
Allocation
9
Insurance Program
Risk
Owner
Contractor
1. Construction All Risks
2. Construction Delay in Start Up
3. Marine Cargo / Transits
4. Third Party Liability
5. Professional Indemnity
6. Employers Liability
7. Workmen’s Compensation
8. Contractors’ Plant & Equipment
9. Auto Liability
10
Contractor’s entitlement for Risk Events
1. Enactment of new Laws
or Regulations
2. Force Majeure
3. Currrency Risks
4. Site Acsess
5. Differing Site Conditions
6. Errors, omissions, inconsistencies
or
discrepancies
in
the
Specifications/Scope
7. Change in Rely-upon Information
8. Acceleration or disrupton by Client
9. Delay or Suspension by Client
10. Special Risks
11. Delayed Approvals
11
Risk Allocation in FIDIC Silver Book (FSB)
•
Drafted to be used internationally in 1999. Specifically
introduced for Project Financed Works for Engineer,
Procure, Construct i.e. EPC Contracts
•
Extensively debated in industry forums.
•
The Silver Book is recommended for use on process,
power and private-infrastructure projects where a
Contractor is to take on full responsibility for the design
and execution of a project. Where certainty of final price
and often of completion date are of extreme importance.
• Risks for completion to time, cost and quality are
transferred to the Contractor.
•
Employer’s Requirements can also be linked with
Performance Specification
•
Substantial Risk transfer to the Contractor
•
Lump Sum Contract Price (adjustments in limited
specified cases)
12
Risk Allocation to Contractor (FSB)
The risks are mostly allocated to the contractor. The following identify the
main risks that have been allocated to the Contractor
• Design obligations and errors
•
Setting Out risks i.e. errors in the ‘Items of reference’
• Unforeseeable Difficulties’ all necessary information as to risks,
contingencies and other circumstances which may influence or affect the
Works
• sub-surface and hydrological conditions. The Contractor shall be
responsible for verifying and interpreting such data. Owner is having no
responsibility for the accuracy, sufficiency or completeness of such data.
•
Any data received does not relieve the contractor from responsibility for
the design and execution except for specified rely upon data/information.
•
use or occupation by the Owner of any part of the Permanent Works,
except as may be specified in the Contract
•
Indemnity obligations
•
Requirements can be linked with Performance Specification
•
Lump Sum Contract Price (adjustments in limited specified cases)
13
Risk Allocation to Contractor (FSB)
• war, hostilities (whether war be declared or not), invasion, act of
foreign enemies,
• rebellion, terrorism, revolution, insurrection, military or usurped
power, or civil war, within the Country,
• riot, commotion or disorder within the Country by persons other
than the Contractor's Personnel and other employees of the
Contractor and Subcontractors,
• munitions of war, explosive materials, ionizing radiation or
contamination by radio-activity, within the Country, except as may
be attributable to the Contractor's use of such munitions,
explosives, radiation or radio-activity, and
• pressure waves caused by aircraft or other aerial devices travelling
at sonic or supersonic speeds.
14
Way Forward
1.
Increasing numbers of mega projects are
executed under complex EPC commercial
frameworks.
Conclusive EPC agreement for a specific
project can be a cumbersome but crucial task.
It is important that owner and the contractor
should be involved in the risk allocation
process, which should begin early in the
project life cycle.
2.
Use of industry standards & frameworks shall
be encouraged.
3.
Appropriate risk allocation will encourage
contracting parties to change the adversarial
relationships to a more cooperative approach
and successfully project delivery.
15