1. Identifying and Managing
Risks in EPC Contracts
Presented By:
Criterium Consulting Group, Inc.
Philip Hamblin, Esq.
Property of Criterium Consulting
May 28, 2013
2. Property of Criterium Consulting
General Overview
A. Introduction to Criterium Consulting
B. Goals of presentation
C. Agenda
1. General overview of EPC contracts
2. Summary of major project risks and case study
examples
3. Proposed risk mitigation or avoidance
techniques
4. Questions
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3. Property of Criterium Consulting
Introduction to Criterium
Criterium Consulting Group, Inc. focuses on litigation support,
alternative dispute resolution services, claims analysis and project
advisory services to the construction, government contracts and
business communities.
Philip Hamblin, Esq. specializes in providing project management
related services including contract review and oversight, schedule
preparation and analysis, risk avoidance, document management, and
change order preparation and negotiation. Mr. Hamblin’s education
includes a Bachelor of Science degree in Construction from Arizona
State University and a Juris Doctorate degree in Law from Rutgers
School of Law, Camden. He is licensed to practice law in the state of
Pennsylvania.
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4. Property of Criterium Consulting
Goals of Presentation
To provide a basic understanding of some
of the risks associated with EPC contracts
and the recommended means to mitigate
these risks.
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5. Property of Criterium Consulting
“EPC” Contracts Basics
General Overview of EPC Contracts
E – Engineering
P – Procurement
C – Construction
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6. Property of Criterium Consulting
General Overview of EPC Contracts
EPC Contracts are one of the most predominant
forms of construction contracts used on large-scale
infrastructure 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, suspension
provisions, liability caps
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7. Property of Criterium Consulting
General Overview of EPC Contracts (Cont.)
Owner has less administrative burden
Potential for multiple disputes is limited
The contractor bears the risk of integrating the
performance of all packages (including subcontractors
and designers)
Cost, time and quality can be defined with a higher
degree of certainty due to contractor EPC scope
Interface between engineering and construction is
more streamlined because it is managed by the same
contractor
Key Advantages
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8. Property of Criterium Consulting
General Overview of EPC Contracts (Cont.)
Contractors will add a substantial risk premium to the
bid price
Contractor will often aim for the minimum compliant
standard to decrease costs
Competition is reduced because most contractors
don’t have the financial capability or bonding
capacity to take on the risk of an EPC project
Contractors are often times motivated to make claims
to compensate for risk transfer and recoup losses
Key Disadvantages
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9. Property of Criterium Consulting
EPC Risk Compared to Other Contract Forms
Construction
Management
Owner/Sponsors Contractor
Traditional Design &
Build
EPC
R I S K SEVERITY
Summary of Major Project EPC Risks
The Contractor retains most of the risk in an
EPC Contract when compared to other contract
forms.
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10. Property of Criterium Consulting
Summary of Major Project EPC Risks
Construction Related Risks
Financial and Economic Risks
Geographical and Political Risks
Incomplete and Unbalanced Contract
Project Management Risks
General Categories of Project Risks
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11. Property of Criterium Consulting
Summary of Major Project EPC Risks
Contractor experience and expertise: Does the
contractor have experience performing similar
projects or working in the area (or country)?
Contractor financial stability: Can the contractor
fund the project especially if problems are
encountered?
Procurement: Can the contractor or vendor keep
up with the procurement demands of the project?
Operational Risks: Has the contractor taken into
account local labor and subcontractor risk?
Force Majeure: What unexpected or uncontrollable
event may disrupt construction?
Construction Related Risks
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12. Property of Criterium Consulting
Summary of Major Project EPC Risks
Construction Related Risks
Case Study No. 1: Power Plant (International)
Key Facts (Expertise of Contractor)
Contractor’s prior experience is with supply side with
minimal construction management experience
Contractor’s internal construction management
personnel pool is limited to support project demands and
must be outsourced
Contractor’s collaboration partner lacks experience with
similar projects and has not worked in the region
Management of project is negatively impacted by lack of
expertise
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13. Property of Criterium Consulting
Summary of Major Project EPC Risks
Offshore payment security and accounts: Does
the Owner have accounts set up for payment to the
Contractor?
Payment for cost overruns: Does the contract
provide payment for cost overruns during the
course of the Project?
Payment milestones: Are payment milestones in
advance of cost incurred to provide adequate cash
flow for the Contractor?
Financial & Economic Related Risks
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14. Property of Criterium Consulting
Summary of Major Project EPC Risks
Financial & Economic Related Risks
Case Study No. 2: Power Plant (International)
Key Facts (Financial Impact Example)
Owner obligated to procure Letter of Credit (LC) within
two months of NTP but encounters difficulty with bank on
LC terms
LC is not procured until almost 11 months after NTP
resulting in delay to issuance of Advance Payment to
Contractor
Procurement of equipment is delayed until LC and
payment means in place resulting in delays to project
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15. Property of Criterium Consulting
Summary of Major Project EPC Risks
Political Instability: Is there a risk of terrorism, mass labor
strikes, civil wars, rioting?
Regulatory Changes: Have the risks of regulatory changes
specific to the host country been analyzed?
Customs Requirements: Have the customs requirements
been investigated to ensure that any impact to procurement
has been accounted for?
Social Customs: Have social customs been analyzed such as
extended public or religious holidays or working hours?
Labor Market: Is skilled labor available in the region or will
expats have to be utilized?
Supplier Availability: Is there a local source for materials or
will materials have to be imported?
Geographical and Political Risks
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16. Property of Criterium Consulting
Summary of Major Project EPC Risks
Geographical and Political Risks
Case Study No. 3: Power Plant (International)
Key Facts (Possible Force Majeure Event)
Terrorist event at another site in region results in the
evacuation of expats from construction site
Evacuation of personnel is based on Contractor’s internal
security policy due to regional risks
Force Majeure clause applies to “any act or event which
is unpredictable, unstoppable and independent from the
will of the parties”
Project is impacted due to lack of expat management
personnel on site
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17. Property of Criterium Consulting
Summary 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 during
Ramadan period
Geographical and Political Risks
Case Study No. 4: Power Plant (International)
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18. Property of Criterium Consulting
Summary of Major Project EPC Risks
Uncontrollable work scope expansion: Are the
parameters of the contractor’s work scope defined
enough to limit scope expansion?
Deficient changes or dispute provisions: Does the
Contract adequately address scope changes,
contractor compensation, and dispute resolution?
Disproportional allocation of risk and reward
benefits: Does the Contract disproportionally
allocate risk to one of the parties?
Adverse legal forum: Is the contractor or Owner
subjected to an adverse legal forum or choice of
law?
Incomplete & Unbalanced Contract
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19. Property of Criterium Consulting
Summary of Major Project EPC Risks
Incomplete & Unbalanced Contract
Case Study No. 5: Power Plant (International)
Key Facts (Incomplete Contract)
Contract did not adequately define parameters of
Contractor’s scope for major structures and equipment
Simple building structures were substantially increased
in size by the Owner during the design phase
High end finishes were requested instead of submitted
finishes
Contractor incurs substantial cost overruns in
engineering and construction related work
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20. Property of Criterium Consulting
Summary of Major Project EPC Risks
Deviation from Contract: Is the contractor
performing work without approval or additional
compensation?
Failing to Document Impacts: Is the contractor
waiving its contractual rights?
Failing to manage costs: Is the contractor
monitoring cost expenditures against an
established budget?
Failing to sufficiently staff project: Is the project
properly staffed from the beginning of the project
so that schedule and costs are properly managed?
Project Management Risks
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21. Property of Criterium Consulting
Summary of Major Project EPC Risks
Project Management Risks
Case Study No. 6: Power Plant (International)
Key Facts (Project and Site Management)
Contractor elected to rely solely on the expertise of the
collaboration partner for onshore scope of work
Contractor did not set up its own project control and
schedule oversight
Contractor project management team was not adequately
staffed to support simultaneous execution of three
separate sites
Contractor was not willing to assert contractual demands
to the Owner; resulting in Owner’s ever growing demand
for more capabilities
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22. Property of Criterium Consulting
Proposed Risk Mitigation or Avoidance Techniques
Fixed price/lump sum Contracts which limit price escalation
Clear identification of performance and completion
targets/milestones
Inclusion of a liquidated damages provision for delay and
underperformance
Testing and rejection rights
Extended warranties and provisions addressing defects
liability
Requirement for contractor to provide performance
guarantees
Favourable choice of law/venue provisions
Contract change provisions which require strict notice
procedures and limit compensability
Owner Risk Mitigation
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23. Property of Criterium Consulting
Proposed Risk Mitigation or Avoidance Techniques
Contract Provisions
Change provisions which allow for an extension of time
and increased costs for delay as a result of circumstances
beyond the contractor’s control
Broad force majeure protection which allows contractor to
pursue compensation for both cost and time
Clear contract provisions which require the Owner to
timely process payments and turnaround submittals
Caps on liquidated damages exposure and inclusion of
favourable limitation of liability provisions
Payment provisions which allow contractor to maintain a
positive cash flow
Contractor Risk Mitigation
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24. Property of Criterium Consulting
Proposed Risk Mitigation or Avoidance Techniques
Contract Provisions (Cont.)
Performance requirements that can be reasonably
achieved including an achievable contract schedule
Clearly defined dispute resolution procedure with
favorable venue/choice of law
Termination clause allowing contractor to terminate for
lack of payment, material breach by Owner or prolonged
force majeure event
Clearly defined scope parameters which limit Owner’s
ability to cause “scope growth” without being subjected
to the Changes provisions
Contractor Risk Mitigation
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25. Property of Criterium Consulting
Proposed Risk Mitigation or Avoidance Techniques
Project Management Risk Mitigation
JV partnerships or subcontractor arrangements to compensate
for contractor’s inexperience or lack of in-house resources
Understand host country risks and procure in-country
assistance to address financial, procurement, construction, and
legal related risks
Adequately staff project from inception with experienced
individuals rather than waiting until it is too late
Manage project costs on a continuing basis to identify potential
overruns before they occur and can be mitigated
Provide accurate and timely updates to the project schedule
and project critical path
Ensure management personnel understands scope and does
not proceed with extra work without a Change Order
Contractor Risk Mitigation
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