EPC Analysiz PDF

EPC CONTRACTS: RISKS IN MEGA EPC PROJECTS
Agenda for Presentation

EPC Contract Fundamentals:
Fixed Price Contract

Economic Benefits
1/7/2010
EPC Contract Fundamental: Some Questions
Contracting Strategy
Contract Performance Risks
Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

and 5th May 2009 by
Presented at the World Engineering Congress Bangkok 4th
Graphs and Figures
Revenue Profile For a Typical EPC Contract
Execution Risk As EPC Contract Progresses
Execution Risk As Cost Plus Contract Progresses
Relative Risk Reward Profiles of Different Contract Strategies
EPC Contract Execution Risks: Owner Contractor

Interactions
Owner Demands and Oversights
Contractor Pressures
Disputes: Causes and Possible Reasons
Summary Research Findings: Risk Management
1 Case Study in Risk Management:

EPC Contract Risk Assessment and Mitigation During
Economic Meltdown
EPC Contract: Advantages
Fixed Price Contract, Negligible Escalation
Design-build/engineer, procure, construct EPC

contracting can potentially save millions of

and 5th May 2009 by
dollars up front, as well as dollars paid in
change orders while construction proceeds.
Hardly any escalation in costs occur
Contractor brings to fore the best practices in

project management
Timely Execution and Project earnings Start

2 Faster
Life Cycle Cost of Project Diminishes.

EPC Contract Fundamental: Some Questions
Owners often question whether the

checks and balances are in place and
question who really pays for alterations
in design.

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Owners look toward the design-
build/EPC contractor to be the one stop
shop and the last stop for all the costs to
be incurred for a projectfrom inception
to project closeout.
Thus, change becomes an issue that may

not be well defined in todays design
3 build/ EPC construction environment.
EPC Contract Fundamentals: Some Questions
In a changing world, what does uncertainty mean

for the design-build/EPC industry?
What do the current world economic conditions, as

well as the current U.S. economic conditions mean

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to a design-build/EPC contractor wanting to play in
the construction industry today?
How do factors such as labor supply restrictions,

loss of intellectual knowledge, and gap in fund
availability for the infrastructure projects pose
challenges to a design-build/EPC contractor
wanting to play in say E&P or Power Sector.
4
EPC Contract Fundamentals: Contracting Strategy
Contracting Strategies
The design-build/EPC process merely establishes the

roles and relationships among the key members of the

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project team.
To achieve the specific project goals, however, the

delivery system must be compatible with the owners
contracting methodology and procurement process.
One of the single most important decisions that any

design-build/EPC contractor will make is on the type of
5 contract that it enters into with an owner.
The contract strategy represents the way in which the

delivery
Systems are packaged and paid for by the owner.
Owner will insist via the contract provisions that the

contractor, in return for being paid to execute those

and 5th May 2009 by
functions,
-also accepts the risks of performing

-those functions according to the standards
-and conditions laid down in the contract
6
Typically, in fixed-price contracting, any unforeseen cost is

not strictly underwritten within the original contract and
likely to be assumed by the contractor.
The fixed price that envelops the contract should

accommodate a worst-case scenario if execution risks
become a reality.

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This buffer is calculated in the form of a contingency and
can represent up to 15% of the asking price.
The best case scenario is that these are not exercised, in

which situation they are released and materialize as
additional cream on top of the base price/margin.
7 In the worst-case scenario, these risks exceed the

contingencies put in place and erode the base margin to an
extent that the contractor loses money on the project
When the contractor provides a price for the design build/

EPC scope, it is obligating itself to provide the
project scope and quality that meets the owners

requirements functionality,

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affirms can be accomplished within the time
required timeliness, and thus
affirms that its costs are sufficient to meet both

requirements in terms of resources labor,
equipment, and so onall for a fixed cost.
8
Contractors initially welcomed the lions share of risk on EPC

projects in return for the significant profit potential that could be
derived from having simultaneous control over
design,

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procurement, and
construction and
any resulting efficiencies in cost and schedule.
9
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Revenue Profile Rebased to 1 for a Typical EPC Contract
10
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Typical Amplification of Execution Risk As EPC Contract Progresses
11
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Typical Amplification of Execution Risk With Cost Plus Contract
12
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Relative Risk Reward Profiles of Different Contract Strategies
13
EPC Contract Execution
Owner Contractor Interactions: Owner Demands
However many owners demand
Increased role in the design process,

Heightened fast-track completion requirements,

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Enhanced performance guaranties
Owner supplied equipment
With no corresponding assumption of risk, and without a

proper change management process defined in the EPC
Contract for such interventions.
14
Owner Contractor Interactions: Contractor Pressures
Risks associated with third-party technology and

equipment supplied by owner equipment
manufacturers (OEMs) increasingly shifted to the
contractor.

and 5th May 2009 by
Contractors bid on EPC projects where they were
Unable to adequately utilize value engineering
Unable to Innovate to Balance
15
Forced to swallow increase in risk.
Owner Contractor Interactions: Consequences
Profit margins declined,

Owner penalties increased,
EPC contractors were caught in the squeeze.

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Not surprisingly, contractors met the increase in risk
with higher pricing, thereby depriving owners of the
cost savings EPC projects were intended to provide.
Even worse, the incidence of disputes soared, often

followed by protracted and costly litigation.
16
Owner Contractor Interactions: Disputes
A recent survey of construction trends in Power

Plants in US, Europe and Asia and Middle East

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By BASmS Business Intelligence Group
found that there has been a significant
Increase in construction related disputes over

the past few months
The survey also found that the disputes were

much more prevalent on complex projects
17
costing more than $500 million
Thus the major causes of disputes and claims:
1.Architect/engineer error and omission,

and 5th May 2009 by
2.Excessive change orders and owner/contractor
interference.
Less frequent causes mentioned were
18
differing site conditions,
acceleration issues and
non-performance of subcontractors.
Possible Reasons
Tighter current global economic environment

fight harder for every dollar

and 5th May 2009 by
leads to hard-line negotiations,
tough contract terms and
strict enforcement of contract language.

19
Summary of Research Findings
Recent project experience and recent

trends within the construction industry
indicate that executing projects is going
to be more difficult and more risky in the

and 5th May 2009 by
future.
Understanding these risks and their legal
implications will be critical so that both
the owners and the design-build/EPC
contractors can be successful.
EPC Contracting with negotiated alliance
and change management processes built
in may be more viable alternatives.
20 Rigorous Use of Risk Management
Techniques will become a necessity for
EPC Contractors while Bidding, Planning
and Executing.
and 5th May 2009 by
Managing Risks

As an integral part of sound project

management practices,

Risk management is a systematic and
proactive approach to reduce uncertainties
21
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22
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23
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Risk Assessment and Mitigation During Economic
Case Study in Risk Management: EPC Contract
Meltdown.
24
EPC Contract Risk Assessment and Mitigation During Economic
Meltdown.
1..EPC Risk Dynamics

Measures of Economic Downturn and Macro Impacts
Six Macro Economic Factors
GDP
Global Equities
Exchange Rates, Capital Flows and Chinese Yuan
Manufacturing and Industrial Production

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Oil Price Volatility and E&P Spending
Oil Price Volatility and E&P Cost Dynamics
2.EPC Risk Analysis and Mitigation :

Risk Allocation
Insurance and Hedging
3.EPC Projects Data : Value at Risk

Projects Affected
Research Findings
4.Worlds Largest EPC Contractors
25 Backlog and Impact on Global Forward Manufacturing
5. Thank You
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Economic Downturn and Macro Impacts: The Six Factors
26
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Economic Downturn and Macro Impacts on GDP Growth
27
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Economic Downturn and Macro Impacts on Global Equities
28
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Economic Downturn and Macro Impacts on
Exchange Rates and Capital Inflows
29
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Chinese Yuan: Government Manipulated Exchange Rates

Economic Downturn and Macro Impacts
30
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Economic Downturn and Macro Impacts on Manufacturing
31
Economic Downturn and Macro Impacts on Industrial Production

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32
Economic Downturn and Macro Impacts:
E&P Costs Escalate and Fall In Meltdown

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Dynamics
Of Risks
33
E&P IHS/CERA Upstream Capital Costs Index

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Economic Downturn and Macro Impacts:
Exploration and Production Spending

Oil Price Volatility and
34
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35
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36
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Risk Analysis Mitigation Insurance
38
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Risk Analysis Mitigation Risk Transfer Instruments
39
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40
MANAGING EPC RISKS IN MEGA EPC PROJECTS
RECOVERY FROM THE DOWNTURN
The Projects Affected During Transition
1.Ras Tanura Integrated Project (RTIP)

2.Pearl GTL
3.Petro Rabigh Refinery Upgrade

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4.Shah Sour Gas Field Development
5.Khurais Oilfield
6.Manifa Offshore Oilfield
7.Saudi Kayan Petrochemicals Complex
8.Hassyan Power & Desalination Plant
9.Ras Girtas Power Project
10.Shaybah Phase 2 Expansion
41
Total cost: $114.5 billion
The countries behind our project list are Saudi Arabia,
Qatar and the UAE, where energy and infrastructure projects
on a world-leading scale continue to progress.
With almost US$120 billion worth of critical energy and infrastructure projects
up for grabs
EPC Companies Who Matter
1. Bechtel (USA)
2. Technip (France)
3. Aker Solutions (Norway)
4. Chiyoda Corporation (Japan)

and 5th May 2009 by
5. SNC-Lavalin Group (Canada)
6. J. Ray McDermott (USA)
7. JGC Corporation (Japan)
8. Hyundai Heavy Industries (South Korea)
9. Foster Wheeler (USA)
10. Daelim Industrial Company (South
Korea)
42
EPC Companies Who Matter..Contd
Fluor, Foster Wheeler, Shaw Group, Jacobs,

and 5th May 2009 by
Technip, Toyo, JGC, Toyota, and GS
Engineering in Korea, they typically win the
majority of the work. As their backlogs
increase thats a clear barometer that
equipment will be ordered going forward and
are signals for the manufacturers to start
forward Planning.
43
Projects Today
1. Nassiriya Oilfield (Iraq)
2. Integrated Gas Development Project
(UAE)
3. South Pars Gas Field (Iran)

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4. Jubail Export Refinery (Saudi Arabia)
5. Tianjin Petrochemicals Complex
(China)
6. Touat Gas Field (Algeria)
7. Gassi Touil Gas Field (Algeria)
8. Skikda Refinery Upgrade (Algeria)
44 9. Sipchem Polyvinyl Plants (Saudi
Arabia)
10. Borouge (UAE)
Projects Today
1. Trans Sahara Pipeline
2. Al-Shaheen Refinery
3. Nabucco Pipeline

and 5th May 2009 by
4. Yanbu Export Refinery
5. Khalifa Point & Fujairah
Refineries
6. Jubail Export Refinery
7. Integrated Gas Development
45
8. Abu Dhabi Crude Oil Pipeline
9. Kuwait Oil Co drilling platforms
10. Oman oilfield services contract
and 5th May 2009 by
46
You
Thank
46

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EPC CONTRACTS: RISKS IN MEGA EPC PROJECTS

Agenda for Presentation

Fixed Price Contract

Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

EPC Contract Execution Risks: Owner Contractor

1 Case Study in Risk Management:

Design-build/engineer, procure, construct EPC

Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

Hardly any escalation in costs occur

Contractor brings to fore the best practices in

Timely Execution and Project earnings Start

Life Cycle Cost of Project Diminishes.

Owners often question whether the

Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

Thus, change becomes an issue that may

In a changing world, what does uncertainty mean

What do the current world economic conditions, as

Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

How do factors such as labor supply restrictions,

The design-build/EPC process merely establishes the

Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

To achieve the specific project goals, however, the

One of the single most important decisions that any

The contract strategy represents the way in which the

Systems are packaged and paid for by the owner.

Owner will insist via the contract provisions that the

Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

-also accepts the risks of performing

Typically, in fixed-price contracting, any unforeseen cost is

The fixed price that envelops the contract should

Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

The best case scenario is that these are not exercised, in

7 In the worst-case scenario, these risks exceed the

When the contractor provides a price for the design build/

project scope and quality that meets the owners

Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

affirms that its costs are sufficient to meet both

Contractors initially welcomed the lions share of risk on EPC

Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

However many owners demand

Increased role in the design process,

Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

With no corresponding assumption of risk, and without a

Risks associated with third-party technology and

Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

Unable to adequately utilize value engineering

Unable to Innovate to Balance

Profit margins declined,

Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

Even worse, the incidence of disputes soared, often

A recent survey of construction trends in Power

Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

Increase in construction related disputes over

The survey also found that the disputes were

Thus the major causes of disputes and claims:

1.Architect/engineer error and omission,

Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

Less frequent causes mentioned were

acceleration issues and

Tighter current global economic environment

Dr. Himadri Banerji CMD BASmS Pvt. Ltd.

tough contract terms and

strict enforcement of contract language.