EPC CONTRACTS: RISKS IN MEGA EPC PROJECTS
          Agenda for Presentation
          EPC Contract Fundamentals:

        ...
EPC Contract: Advantages
Fixed Price Contract, Negligible Escalation




                    Design-build/engineer, procur...
EPC Contract Fundamental: Some Questions


                       Owners often question whether the
                      ...
EPC Contract Fundamentals: Some Questions

                  In a changing world, what does uncertainty mean
             ...
EPC Contract Fundamentals: Contracting Strategy

               Contracting Strategies

               The design-build/EP...
EPC Contract Fundamentals: Contracting Strategy
Contract Performance Risks

               Systems are packaged and paid f...
EPC Contract Fundamentals: Contracting Strategy
Contract Performance Risks

            Typically, in fixed-price contract...
EPC Contract Fundamentals: Contracting Strategy
Contract Performance Risks


            When the contractor provides a pr...
EPC Contract Fundamentals: Contracting Strategy
 Contract Performance Risks


Contractors initially welcomed the lion’s sh...
Presented at the World Engineering Congress Bangkok 4th
                                                          and 5th ...
Presented at the World Engineering Congress Bangkok 4th
                                                                  ...
Presented at the World Engineering Congress Bangkok 4th
                                                                  ...
Presented at the World Engineering Congress Bangkok 4th
                                                                 a...
EPC Contract Execution
Owner Contractor Interactions: Owner Demands

             However many owners demand

            ...
EPC Contract Execution
Owner Contractor Interactions: Contractor Pressures

Risks associated with third-party technology a...
EPC Contract Execution
Owner Contractor Interactions: Consequences

Profit margins declined,
        Owner penalties incre...
EPC Contract Execution
Owner Contractor Interactions: Disputes




      A recent survey of construction trends in Power
 ...
EPC Contract Execution
Owner Contractor Interactions: Disputes


Thus the major causes of disputes and claims:


       1....
EPC Contract Execution
Owner Contractor Interactions: Disputes
Possible Reasons




             Tighter current global ec...
Summary of Research Findings

     Recent project experience and recent
     trends within the construction industry
     ...
Dr. Himadri Banerji CMD BASmS Pvt. Ltd.
                                                  and 5th May 2009 by
            ...
Presented at the World Engineering Congress Bangkok 4th
and 5th May 2009 by
Dr. Himadri Banerji CMD BASmS Pvt. Ltd.
      ...
Presented at the World Engineering Congress Bangkok 4th
and 5th May 2009 by
Dr. Himadri Banerji CMD BASmS Pvt. Ltd.
      ...
Presented at the World Engineering Congress Bangkok 4th
                                                 and 5th May 2009 ...
EPC Contract Risk Assessment and Mitigation During Economic
Meltdown.


              1..EPC Risk Dynamics
               ...
Presented at the World Engineering Congress Bangkok 4th
                                                       and 5th May...
Presented at the World Engineering Congress Bangkok 4th
                                                    and 5th May 20...
Presented at the World Engineering Congress Bangkok 4th
                                                         and 5th M...
Presented at the World Engineering Congress Bangkok 4th
                                         and 5th May 2009 by
     ...
Presented at the World Engineering Congress Bangkok 4th
                                                      and 5th May ...
Presented at the World Engineering Congress Bangkok 4th
                                                       and 5th May...
Economic Downturn and Macro Impacts on Industrial Production




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




                                         ...
Presented at the World Engineering Congress Bangkok 4th
                                       and 5th May 2009 by
       ...
Presented at the World Engineering Congress Bangkok 4th
and 5th May 2009 by
Dr. Himadri Banerji CMD BASmS Pvt. Ltd.
      ...
Presented at the World Engineering Congress Bangkok 4th
and 5th May 2009 by
Dr. Himadri Banerji CMD BASmS Pvt. Ltd.
      ...
Presented at the World Engineering Congress Bangkok 4th
and 5th May 2009 by
Dr. Himadri Banerji CMD BASmS Pvt. Ltd.
      ...
Presented at the World Engineering Congress Bangkok 4th
                                     and 5th May 2009 by
         ...
Presented at the World Engineering Congress Bangkok 4th
                                                     and 5th May 2...
Presented at the World Engineering Congress Bangkok 4th
and 5th May 2009 by
Dr. Himadri Banerji CMD BASmS Pvt. Ltd.
      ...
MANAGING EPC RISKS IN MEGA EPC PROJECTS
            RECOVERY FROM THE DOWNTURN

The Projects Affected During Transition

 ...
MANAGING EPC RISKS IN MEGA EPC PROJECTS
RECOVERY FROM THE DOWNTURN
EPC Companies Who Matter
           1.    Bechtel (USA)...
MANAGING EPC RISKS IN MEGA EPC PROJECTS
RECOVERY FROM THE DOWNTURN
EPC Companies Who Matter..Contd



            Fluor, F...
Projects Today
           1.    Nassiriya Oilfield (Iraq)
           2.    Integrated Gas Development Project
            ...
Projects Today
                 1.    Trans Sahara Pipeline
                 2.    Al-Shaheen Refinery
                 3....
Presented at the World Engineering Congress Bangkok 4th
      and 5th May 2009 by
      Dr. Himadri Banerji CMD BASmS Pvt....
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Risk Assessment, Mitigation And Management In Epc Projects With Case Study By Dr. Himadri Banerji

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Risk Assessment, Analysis, Mitigation and Management of EPC is therefore, of prime importance today especially with newer risks thrown open by the global economic meltdown related risks, risk related liabilities for performance are allocated to the EPC contractor, with instruments as Liquidated Damages, Extended Guarantees, Latent Defect Liabilities etc.

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Risk Assessment, Mitigation And Management In Epc Projects With Case Study By Dr. Himadri Banerji

  1. 1. 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”
  2. 2. EPC Contract: Advantages Fixed Price Contract, Negligible Escalation Design-build/engineer, procure, construct EPC contracting can potentially save millions of Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th 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.
  3. 3. 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. Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th 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 project—from inception to project closeout. Thus, change becomes an issue that may not be well defined in today’s design 3 build/ EPC construction environment.
  4. 4. 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 Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th 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
  5. 5. EPC Contract Fundamentals: Contracting Strategy Contracting Strategies The design-build/EPC process merely establishes the roles and relationships among the key members of the Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th project team. To achieve the specific project goals, however, the delivery system must be compatible with the owner’s 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
  6. 6. EPC Contract Fundamentals: Contracting Strategy Contract Performance Risks 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 Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th functions, -also accepts the risks of performing -those functions according to the standards -and conditions laid down in the contract 6
  7. 7. EPC Contract Fundamentals: Contracting Strategy Contract Performance Risks 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. Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th 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
  8. 8. EPC Contract Fundamentals: Contracting Strategy Contract Performance Risks 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 owner’s requirements functionality, Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th 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 on—all for a fixed cost. 8
  9. 9. EPC Contract Fundamentals: Contracting Strategy Contract Performance Risks Contractors initially welcomed the lion’s share of risk on EPC projects in return for the significant profit potential that could be derived from having simultaneous control over design, Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th procurement, and construction and any resulting efficiencies in cost and schedule. 9
  10. 10. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. Revenue Profile Rebased to 1 for a Typical EPC Contract 10
  11. 11. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. Typical Amplification of Execution Risk As EPC Contract Progresses 11
  12. 12. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. Typical Amplification of Execution Risk With Cost Plus Contract 12
  13. 13. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. Relative Risk Reward Profiles of Different Contract Strategies 13
  14. 14. EPC Contract Execution Owner Contractor Interactions: Owner Demands However many owners demand Increased role in the design process, Heightened fast-track completion requirements, Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th 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
  15. 15. EPC Contract Execution Owner Contractor Interactions: Contractor Pressures Risks associated with third-party technology and equipment supplied by owner equipment manufacturers (OEMs) increasingly shifted to the contractor. Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th 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.
  16. 16. EPC Contract Execution Owner Contractor Interactions: Consequences Profit margins declined, Owner penalties increased, EPC contractors were caught in the squeeze. Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th 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
  17. 17. EPC Contract Execution Owner Contractor Interactions: Disputes A recent survey of construction trends in Power Plants in US, Europe and Asia and Middle East Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th 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
  18. 18. EPC Contract Execution Owner Contractor Interactions: Disputes Thus the major causes of disputes and claims: 1.Architect/engineer error and omission, Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th 2.Excessive change orders and owner/contractor interference. Less frequent causes mentioned were 18 differing site conditions, acceleration issues and non-performance of subcontractors.
  19. 19. EPC Contract Execution Owner Contractor Interactions: Disputes Possible Reasons Tighter current global economic environment… fight harder for every dollar Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th leads to hard-line negotiations, tough contract terms and strict enforcement of contract language. 19
  20. 20. 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 Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th 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.
  21. 21. Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th Managing Risks As an integral part of sound project management practices, Risk management is a systematic and proactive approach to reduce uncertainties 21
  22. 22. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. 22
  23. 23. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. 23
  24. 24. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. Risk Assessment and Mitigation During Economic Case Study in Risk Management: EPC Contract Meltdown. 24
  25. 25. 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 Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th 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.World’s Largest EPC Contractors 25 Backlog and Impact on Global Forward Manufacturing 5. Thank You
  26. 26. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. Economic Downturn and Macro Impacts: The Six Factors 26
  27. 27. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. Economic Downturn and Macro Impacts on GDP Growth 27
  28. 28. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. Economic Downturn and Macro Impacts on Global Equities 28
  29. 29. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. Economic Downturn and Macro Impacts on Exchange Rates and Capital Inflows 29
  30. 30. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Chinese Yuan: Government Manipulated Exchange Rates Dr. Himadri Banerji CMD BASmS Pvt. Ltd. Economic Downturn and Macro Impacts 30
  31. 31. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. Economic Downturn and Macro Impacts on Manufacturing 31
  32. 32. Economic Downturn and Macro Impacts on Industrial Production Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. 32
  33. 33. Economic Downturn and Macro Impacts: E&P Costs Escalate and Fall In Meltdown Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th Dynamics Of Risks 33 E&P IHS/CERA Upstream Capital Costs Index
  34. 34. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. Economic Downturn and Macro Impacts: Exploration and Production Spending Oil Price Volatility and 34
  35. 35. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. 35
  36. 36. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. 36
  37. 37. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. 37
  38. 38. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. Risk Analysis Mitigation Insurance 38
  39. 39. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. Risk Analysis Mitigation Risk Transfer Instruments 39
  40. 40. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. 40
  41. 41. 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 Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th 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
  42. 42. MANAGING EPC RISKS IN MEGA EPC PROJECTS RECOVERY FROM THE DOWNTURN EPC Companies Who Matter 1. Bechtel (USA) 2. Technip (France) 3. Aker Solutions (Norway) 4. Chiyoda Corporation (Japan) Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th 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
  43. 43. MANAGING EPC RISKS IN MEGA EPC PROJECTS RECOVERY FROM THE DOWNTURN EPC Companies Who Matter..Contd Fluor, Foster Wheeler, Shaw Group, Jacobs, Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th Technip, Toyo, JGC, Toyota, and GS Engineering in Korea, they typically win the majority of the work. As their backlogs increase that’s a clear barometer that equipment will be ordered going forward and are signals for the manufacturers to start forward Planning. 43
  44. 44. Projects Today 1. Nassiriya Oilfield (Iraq) 2. Integrated Gas Development Project (UAE) 3. South Pars Gas Field (Iran) Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th 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)
  45. 45. Projects Today 1. Trans Sahara Pipeline 2. Al-Shaheen Refinery 3. Nabucco Pipeline Dr. Himadri Banerji CMD BASmS Pvt. Ltd. and 5th May 2009 by Presented at the World Engineering Congress Bangkok 4th 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
  46. 46. Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd. 46 Thank You 46

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