Strategic Planning : The best way to manage EPC Contract Risks

Pankaj K Sinha Abu Dhabi 17th Nov 2014

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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.

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Risk Build Up and Time

Stage 1 Stage 2

Stage 3

Stage 4

OperationEPCFEED

Feasibility Study

Stage 2DesignEPC PQRisk WorkshopTerm SheetPre-bid conferenceRFP

Stage 1Business caseRisk WorkshopStakeholders’ inputExecution Strategy

Stage 3Risk WorkshopBidding & ContractDetailed DesignProcurementConstructionCommissioning

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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

Risk

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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 for Project Risk Management - PMI

• 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

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Potential IPRA Application Points

Program Decision

Pre-Project Planning

Engineering & Design Construction Operations

Secondary Primary

= Potential application points

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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.

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Hot Button Risks (Typical)

1. Site Conditions

2. Joint & several responsibility

3. Review and approvals

4. Liquidated Damages for Delay & Performance

5. Indemnity

6. Insurance Allocation

7. Force Majeure

8. Change Management

9. Nominated Subcontractors

10.Design Responsibility

11.Change in Law/Specifications/Regulations

12.Standard of Care

13.Performance and Acceptance Criteria

14.Dispute Resolution

Risk Workshop

Stakeholders’ input on risks/due diligence

Bid Package

Contract

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Risk Allocation MatrixRisk Brief

DetailsRisk

probability

Mitigation Measures

Contractor

Owner Insurance

Site Conditions

Joint & several responsibilityReview and approvalsLiquidated Damages for Delay & Performance

Indemnity

Insurance Allocation

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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

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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

Contractor’s entitlement for Risk Events

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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)

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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)

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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.

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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.