Criterium epc project risks (5.28.13)
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Criterium epc project risks (5.28.13)

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Presentation for Division 4, ABA Forum on Construction. May 2013

Presentation for Division 4, ABA Forum on Construction. May 2013

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  • 1. Identifying and ManagingRisks in EPC ContractsPresented By:Criterium Consulting Group, Inc.Philip Hamblin, Esq.Property of Criterium ConsultingMay 28, 2013
  • 2. Property of Criterium ConsultingGeneral OverviewA. Introduction to Criterium ConsultingB. Goals of presentationC. Agenda1. General overview of EPC contracts2. Summary of major project risks and case studyexamples3. Proposed risk mitigation or avoidancetechniques4. Questions2
  • 3. Property of Criterium ConsultingIntroduction to CriteriumCriterium Consulting Group, Inc. focuses on litigation support,alternative dispute resolution services, claims analysis and projectadvisory services to the construction, government contracts andbusiness communities.Philip Hamblin, Esq. specializes in providing project managementrelated services including contract review and oversight, schedulepreparation and analysis, risk avoidance, document management, andchange order preparation and negotiation. Mr. Hamblin’s educationincludes a Bachelor of Science degree in Construction from ArizonaState University and a Juris Doctorate degree in Law from RutgersSchool of Law, Camden. He is licensed to practice law in the state ofPennsylvania.3
  • 4. Property of Criterium ConsultingGoals of PresentationTo provide a basic understanding of someof the risks associated with EPC contractsand the recommended means to mitigatethese risks.4
  • 5. Property of Criterium Consulting“EPC” Contracts BasicsGeneral Overview of EPC ContractsE – EngineeringP – ProcurementC – Construction5
  • 6. Property of Criterium ConsultingGeneral Overview of EPC ContractsEPC Contracts are one of the most predominantforms of construction contracts used on large-scaleinfrastructure projects Basic Features Single point of responsibility Fixed contract price and completion date Performance specification Plant performance guarantees Contractor performance guarantees (e.g. bank guarantee,retention withholding, parent company guarantee) Other: Force majeure, termination, suspensionprovisions, liability caps6
  • 7. Property of Criterium ConsultingGeneral Overview of EPC Contracts (Cont.)Owner has less administrative burdenPotential for multiple disputes is limitedThe contractor bears the risk of integrating theperformance of all packages (including subcontractorsand designers)Cost, time and quality can be defined with a higherdegree of certainty due to contractor EPC scopeInterface between engineering and construction ismore streamlined because it is managed by the samecontractorKey Advantages7
  • 8. Property of Criterium ConsultingGeneral Overview of EPC Contracts (Cont.)Contractors will add a substantial risk premium to thebid priceContractor will often aim for the minimum compliantstandard to decrease costsCompetition is reduced because most contractorsdon’t have the financial capability or bondingcapacity to take on the risk of an EPC projectContractors are often times motivated to make claimsto compensate for risk transfer and recoup lossesKey Disadvantages8
  • 9. Property of Criterium ConsultingEPC Risk Compared to Other Contract FormsConstructionManagementOwner/Sponsors ContractorTraditional Design &BuildEPCR I S K SEVERITYSummary of Major Project EPC RisksThe Contractor retains most of the risk in anEPC Contract when compared to other contractforms.9
  • 10. Property of Criterium ConsultingSummary of Major Project EPC RisksConstruction Related RisksFinancial and Economic RisksGeographical and Political RisksIncomplete and Unbalanced ContractProject Management RisksGeneral Categories of Project Risks10
  • 11. Property of Criterium ConsultingSummary of Major Project EPC Risks Contractor experience and expertise: Does thecontractor have experience performing similarprojects or working in the area (or country)? Contractor financial stability: Can the contractorfund the project especially if problems areencountered? Procurement: Can the contractor or vendor keepup with the procurement demands of the project? Operational Risks: Has the contractor taken intoaccount local labor and subcontractor risk? Force Majeure: What unexpected or uncontrollableevent may disrupt construction?Construction Related Risks11
  • 12. Property of Criterium ConsultingSummary of Major Project EPC RisksConstruction Related RisksCase Study No. 1: Power Plant (International) Key Facts (Expertise of Contractor) Contractor’s prior experience is with supply side withminimal construction management experience Contractor’s internal construction managementpersonnel pool is limited to support project demands andmust be outsourced Contractor’s collaboration partner lacks experience withsimilar projects and has not worked in the region Management of project is negatively impacted by lack ofexpertise12
  • 13. Property of Criterium ConsultingSummary of Major Project EPC Risks Offshore payment security and accounts: Doesthe Owner have accounts set up for payment to theContractor? Payment for cost overruns: Does the contractprovide payment for cost overruns during thecourse of the Project? Payment milestones: Are payment milestones inadvance of cost incurred to provide adequate cashflow for the Contractor?Financial & Economic Related Risks13
  • 14. Property of Criterium ConsultingSummary of Major Project EPC RisksFinancial & Economic Related RisksCase Study No. 2: Power Plant (International) Key Facts (Financial Impact Example) Owner obligated to procure Letter of Credit (LC) withintwo months of NTP but encounters difficulty with bank onLC terms LC is not procured until almost 11 months after NTPresulting in delay to issuance of Advance Payment toContractor Procurement of equipment is delayed until LC andpayment means in place resulting in delays to project14
  • 15. Property of Criterium ConsultingSummary of Major Project EPC Risks Political Instability: Is there a risk of terrorism, mass laborstrikes, civil wars, rioting? Regulatory Changes: Have the risks of regulatory changesspecific to the host country been analyzed? Customs Requirements: Have the customs requirementsbeen investigated to ensure that any impact to procurementhas been accounted for? Social Customs: Have social customs been analyzed such asextended public or religious holidays or working hours? Labor Market: Is skilled labor available in the region or willexpats have to be utilized? Supplier Availability: Is there a local source for materials orwill materials have to be imported?Geographical and Political Risks15
  • 16. Property of Criterium ConsultingSummary of Major Project EPC RisksGeographical and Political RisksCase Study No. 3: Power Plant (International) Key Facts (Possible Force Majeure Event) Terrorist event at another site in region results in theevacuation of expats from construction site Evacuation of personnel is based on Contractor’s internalsecurity policy due to regional risks Force Majeure clause applies to “any act or event whichis unpredictable, unstoppable and independent from thewill of the parties” Project is impacted due to lack of expat managementpersonnel on site16
  • 17. Property of Criterium ConsultingSummary of Major Project EPC Risks Key Facts (Social Customs) Project located in a region which celebrates Ramadan Ramadan observes fasting for a 30 day period Project is impacted due to productivity impacts duringRamadan periodGeographical and Political RisksCase Study No. 4: Power Plant (International)17
  • 18. Property of Criterium ConsultingSummary of Major Project EPC Risks Uncontrollable work scope expansion: Are theparameters of the contractor’s work scope definedenough to limit scope expansion? Deficient changes or dispute provisions: Does theContract adequately address scope changes,contractor compensation, and dispute resolution? Disproportional allocation of risk and rewardbenefits: Does the Contract disproportionallyallocate risk to one of the parties? Adverse legal forum: Is the contractor or Ownersubjected to an adverse legal forum or choice oflaw?Incomplete & Unbalanced Contract18
  • 19. Property of Criterium ConsultingSummary of Major Project EPC RisksIncomplete & Unbalanced ContractCase Study No. 5: Power Plant (International) Key Facts (Incomplete Contract) Contract did not adequately define parameters ofContractor’s scope for major structures and equipment Simple building structures were substantially increasedin size by the Owner during the design phase High end finishes were requested instead of submittedfinishes Contractor incurs substantial cost overruns inengineering and construction related work19
  • 20. Property of Criterium ConsultingSummary of Major Project EPC Risks Deviation from Contract: Is the contractorperforming work without approval or additionalcompensation? Failing to Document Impacts: Is the contractorwaiving its contractual rights? Failing to manage costs: Is the contractormonitoring cost expenditures against anestablished budget? Failing to sufficiently staff project: Is the projectproperly staffed from the beginning of the projectso that schedule and costs are properly managed?Project Management Risks20
  • 21. Property of Criterium ConsultingSummary of Major Project EPC RisksProject Management RisksCase Study No. 6: Power Plant (International) Key Facts (Project and Site Management) Contractor elected to rely solely on the expertise of thecollaboration partner for onshore scope of work Contractor did not set up its own project control andschedule oversight Contractor project management team was not adequatelystaffed to support simultaneous execution of threeseparate sites Contractor was not willing to assert contractual demandsto the Owner; resulting in Owner’s ever growing demandfor more capabilities21
  • 22. Property of Criterium ConsultingProposed Risk Mitigation or Avoidance Techniques Fixed price/lump sum Contracts which limit price escalation Clear identification of performance and completiontargets/milestones Inclusion of a liquidated damages provision for delay andunderperformance Testing and rejection rights Extended warranties and provisions addressing defectsliability Requirement for contractor to provide performanceguarantees Favourable choice of law/venue provisions Contract change provisions which require strict noticeprocedures and limit compensabilityOwner Risk Mitigation22
  • 23. Property of Criterium ConsultingProposed Risk Mitigation or Avoidance Techniques Contract ProvisionsChange provisions which allow for an extension of timeand increased costs for delay as a result of circumstancesbeyond the contractor’s controlBroad force majeure protection which allows contractor topursue compensation for both cost and timeClear contract provisions which require the Owner totimely process payments and turnaround submittalsCaps on liquidated damages exposure and inclusion offavourable limitation of liability provisionsPayment provisions which allow contractor to maintain apositive cash flowContractor Risk Mitigation23
  • 24. Property of Criterium ConsultingProposed Risk Mitigation or Avoidance Techniques Contract Provisions (Cont.)Performance requirements that can be reasonablyachieved including an achievable contract scheduleClearly defined dispute resolution procedure withfavorable venue/choice of lawTermination clause allowing contractor to terminate forlack of payment, material breach by Owner or prolongedforce majeure eventClearly defined scope parameters which limit Owner’sability to cause “scope growth” without being subjectedto the Changes provisionsContractor Risk Mitigation24
  • 25. Property of Criterium ConsultingProposed Risk Mitigation or Avoidance Techniques Project Management Risk MitigationJV partnerships or subcontractor arrangements to compensatefor contractor’s inexperience or lack of in-house resourcesUnderstand host country risks and procure in-countryassistance to address financial, procurement, construction, andlegal related risksAdequately staff project from inception with experiencedindividuals rather than waiting until it is too lateManage project costs on a continuing basis to identify potentialoverruns before they occur and can be mitigatedProvide accurate and timely updates to the project scheduleand project critical pathEnsure management personnel understands scope and doesnot proceed with extra work without a Change OrderContractor Risk Mitigation25
  • 26. Property of Criterium ConsultingQuestionsQUESTIONS26