Risk on complex_projects_project_auditors

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Risk on Complex Projects: A case study. Presented at PMI EMEA 2012 in Marseilles, France by Joy Gumz, Project Auditors LLC.

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Risk on complex_projects_project_auditors

  1. 1. Risk on Complex Projects: A casestudyPRJ05Joy Gumz, CPA, CISA, PMPProject Auditors, LLC“PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLC All rights reserved
  2. 2. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCAGENDA•  Format of this session: case study•  Case study details•  Audience decision questions & discussion•  Q&A / wrap-up2
  3. 3. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCObjectives•  Better identify risks, both positive andnegative, in the procurement phase•  Define contractual clauses that may reducecomplex project risk•  Understand importance of risk managementduring initiation and planning of theprocurement phase3
  4. 4. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCAbout Project Auditors LLC•  Professional consulting, training and auditing firm–  Professionals certified in accounting, audit & PM•  Experts in project controls: preventative & detective•  Providing assessments, audits and reviews–  Construction & Engineering Projects–  Oil & Gas Projects–  ICT (Information Communications Technology)
  5. 5. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCA few clientsSee more at our website: http://www.projectauditors.com
  6. 6. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCFormat of this session: Case Study•  NASA Methodology•  Published by Chief Knowledge Officer•  Decision-oriented case study•  You will be a main characterwho will eventually makedecisions•  You’ll be provided withdata that was availableat time of the event6
  7. 7. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCAn effective case studySource: NASA Case Study Methodology7•  Does NOT have just one answer•  Fosters decision making•  Generates questions
  8. 8. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCAudience participation - A few questions81  Does anyone work in the oil & gas industry?2  Is anyone arisk manager?
  9. 9. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCCauses for underperformance9*Poor plan/bidding/estimating*Bid/Tender evaluationOwner interventionDesign changesPoor PM / governancePoor team performance* Subcontractor performanceLabor / commodity escalation* Inappropriate contract vehicle
  10. 10. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCOil Refinery Program BackgroundContextCommunicationsRelationshipsTrustUnderstandingInfluence10•  Industrial process plant–  Every refinery is unique–  Expensive to build and operate–  Tolerances fine to produce high quality products•  Take advantage of–  Arabian crude capacity–  Infrastructure in Jubail industrial city 2 complex–  Proximity to potential petrochemical customersand port facilities
  11. 11. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCProject ObjectivesContextCommunicationsRelationshipsTrustUnderstandingInfluence11•  Full conversion refinery–  Ultra low sulphur gasoline and diesel fuel products–  Process Arabian heavy crude feedstock•  Within budget•  Provide petrochemicals for Jubail complex–  Paraxylene, benzene, polymer grade propylene
  12. 12. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCJoint Venture PartnersCommunicationsRelationshipsTrustUnderstandingInfluence1262.5%37.5%
  13. 13. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCKey StakeholdersContextCommunicationsRelationshipsTrustUnderstandingInfluence13•  Saudi Aramco and Total executives, SATORPemployees and contractors•  Saud Royal Family•  Royal Commission•  Tenants in the Jubail 2 industrial complex
  14. 14. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCCost and FinancingContextCommunicationsRelationshipsTrustUnderstandingInfluence14A 400,000 bpd (barrels per day)refinery costs around 30billion yuan ($4.4 billion) inChina, but would require 50billion yuan investment ($7.3billion) in Saudi Arabia.”Sinopec Corp Chairman Su Shulin.(May 18 2010)Expected financing from:* Import-export banks* Saudi Public Investment Fund* Commercial banks* Saudi Aramco
  15. 15. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCProjects Delivered over Original bid:Contractor’s view15
  16. 16. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCMarket and economic conditionsContextCommunicationsRelationshipsTrustUnderstandingInfluence16The increasing size and complexity of projects has led to agrowing reliance on contractors’ capabilities and projectmanagement skills.Infrastructure Today and E&Y Report, 2011A soft EPC market will deliver“comfortable” prices.EPCs willconcentrate on theircore competencies, prudentlyselect projects and focus ongrowth of profitability ratherthan order book.
  17. 17. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCFuture Competitive Position17Source: Wood MacKenzie
  18. 18. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCSome procurement risks (owner)•  Project delivery method may not be optimum•  Contract prices may be over planned budget•  Contract clauses missing or will not drive desiredbehaviour–  Conflict among contractors rather than teamworkand coordination18
  19. 19. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCYour role: Program risk engineerContextCommunicationsRelationshipsTrustUnderstandingInfluence19•  Key Responsibilities–  Provide assurance that high level risks andopportunities are recognized, effectively assessedand managed–  Ensure mitigations are developed, tracked andimplemented to reduce risk to acceptable levels–  Engage functional groups in cross disciplinediscussion on key risk areas and provide support–  Provide overall policy advice on risk management
  20. 20. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCProcurement (you are in this phase)20•  Contracting strategy–  Overall project delivery structure•  Use of a prime contractor•  Number of packages•  Lump sum•  Drafting of contracts
  21. 21. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCPMT: the project management team will control,manage and co-ordinate the project from conceptionto completionProject management team - ownerPackage 1 Package 2 Package 3 Package 4 etcPMT – Owner staff
  22. 22. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLC  Disadvantages•  No single point of accountability•  Potential for increase in costs if lumpsum contracts are not used or changeare not controlled•  Owner assumes overall cost risk•  Considerable reliance on the projectmanager and PMT staff  Advantages•  Allow for fast tracking•  Flexibility•  Owner retains control•  Project Manager provides overallbudget & controlPMT (internal) – owner’s perspective
  23. 23. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLC  DisadvantagesCost•  Difficulty of comparing tender pricesof different designsDesign Process•  Design approval process has to becarefully managed•  Owner’s requirements: oftenperformance based, less prescriptiveQuality•  Less prescriptive specifications pluslump sum pricing may drive ‘lowestpermitted quality’ attitude  AdvantagesRisk•  Single point of responsibility for theEPC scope of work – fitness forpurpose and defect warrantiesQuality•  IF one EPC, design likely to take fullaccount of buildability issuesCost•  Price control - usually lump sumTime•  Accelerate start of construction byoverlapping the design andconstruction processEPC – owner’s perspectiveEPC = Engineer, Procure and Construct
  24. 24. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLC  Disadvantages•  No single point of accountability•  Limited warranties from EPCMcontractor•  Does not provide cost or timecertainty•  Requires substantial managementeffort by the EPCM contractor andsignificant overview responsibility bythe Owner  Advantages•  Enables design streams to beworked up concurrently•  Enables packaging of contracts bytrade, skills or other capabilitieswhere a single contractor entity doesnot have the capability to deliver theentire project•  Less “risk contingency” than EPCEPCM – owner’s perspective
  25. 25. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCList of Packages25
  26. 26. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCProject Status and Timeline26June, Year 1 Award of contractsJan Year 2, Start ConstructionMarch 1, Year 3 15% Equipment on siteJuly, Year 3 60% equipment and 30% piping | SpoolsOct 1, Year 3 1st commissioningDec Year 3 90% equipment 50% piping SpoolsMay 31, Year 4 Final CommissioningOct 31, Year 4, Final Startup
  27. 27. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCSimple Risk Matrix – 5 x 527
  28. 28. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCQuestions and Discussion28
  29. 29. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCYour next steps•  What advice wouldyou provide?29What should we do now?
  30. 30. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCAudience questions1  Project Delivery: Owner PMT with multiple EPCs2  Re-tender – or not?3  Number of packages – any suggestions?4  Contractual clauses – any suggestions?5  Other suggestions to reduce risk at this time?30
  31. 31. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCPossible contractual clauses•  Contractor risk management•  Right to audit•  Schedule and WBS–  Interim and full project–  Levels and due dates31
  32. 32. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCWrap-up: An effective case study32•  Generates more questions than answers•  Leaves important issues unresolved•  Allows for multiple levels of analysis•  Captures a tension between courses of action•  Fosters decision-making thinking
  33. 33. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCRisk Quantification Matrix33
  34. 34. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCContact Information•  Name: Joy Gumz, CPA, CISA, PMP•  Email: jgumz@projectauditors.com•  Phone: +1.949.452.0578•  http://www.projectauditors.com34
  35. 35. “PMI” is a registered trade and service mark of the Project Management Institute, Inc.©2012 Project Auditors LLCYour wrap-up35

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