EPC Analysis

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
Presented at the World Engineering Congress Bangkok 4th and 5th May 2009 by Dr. Himadri Banerji CMD BASmS Pvt. Ltd.
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
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 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 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. Owners look toward the designbuild/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 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 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.
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EPC Contract Fundamentals: Contracting Strategy

Contracting Strategies The design-build/EPC process merely establishes the roles and relationships among the key members of the 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 contract that it enters into with an owner. The contract strategy represents the way in which the delivery
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 functions, -also accepts the risks of performing -those functions according to the standards -and conditions laid down in the contract

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. 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.
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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, 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.
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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, procurement, and construction and any resulting efficiencies in cost and schedule.
Revenue Profile Rebased to 1 for a Typical EPC Contract
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Typical Amplification of Execution Risk As EPC Contract Progresses
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Typical Amplification of Execution Risk With Cost Plus Contract
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Relative Risk Reward Profiles of Different Contract Strategies
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EPC Contract Execution Owner Contractor Interactions: Owner Demands

However many owners demand Increased role in the design process, Heightened fast-track completion requirements, 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.
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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. Contractors bid on EPC projects where they were Unable to adequately utilize value engineering Unable to Innovate to Balance
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EPC Contract Execution Owner Contractor Interactions: Consequences

Profit margins declined, Owner penalties increased, EPC contractors were caught in the squeeze. 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.
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EPC Contract Execution Owner Contractor Interactions: Disputes
A recent survey of construction trends in Power Plants in US, Europe and Asia and Middle East 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 costing more than $500 million
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EPC Contract Execution

Owner Contractor Interactions: Disputes Thus the major causes of disputes and claims: 1.Architect/engineer error and omission, 2.Excessive change orders and owner/contractor interference. Less frequent causes mentioned were differing site conditions, acceleration issues and non-performance of subcontractors.
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EPC Contract Execution Owner Contractor Interactions: Disputes Possible Reasons
Tighter current global economic environment fight harder for every dollar leads to hard-line negotiations, tough contract terms and strict enforcement of contract language.
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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 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. Rigorous Use of Risk Management Techniques will become a necessity for EPC Contractors while Bidding, Planning and Executing.
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Managing Risks As an integral part of sound project management practices, Risk management is a systematic and proactive approach to reduce uncertainties
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Case Study in Risk Management: EPC Contract Risk Assessment and Mitigation During Economic Meltdown.
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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 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
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3.EPC Projects Data : Value at Risk Projects Affected Research Findings 4.Worlds Largest EPC Contractors Backlog and Impact on Global Forward Manufacturing 5. Thank You
Economic Downturn and Macro Impacts: The Six Factors
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Economic Downturn and Macro Impacts on GDP Growth
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Economic Downturn and Macro Impacts on Global Equities
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Economic Downturn and Macro Impacts on Exchange Rates and Capital Inflows
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Economic Downturn and Macro Impacts Chinese Yuan: Government Manipulated Exchange Rates
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Economic Downturn and Macro Impacts on Manufacturing
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Economic Downturn and Macro Impacts on Industrial Production
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Economic Downturn and Macro Impacts: E&P Costs Escalate and Fall In Meltdown
Dynamics Of Risks
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E&P IHS/CERA Upstream Capital Costs Index
Economic Downturn and Macro Impacts: Oil Price Volatility and Exploration and Production Spending
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Risk Analysis Mitigation Insurance
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Risk Analysis Mitigation Risk Transfer Instruments
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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 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
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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. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Bechtel (USA) Technip (France) Aker Solutions (Norway) Chiyoda Corporation (Japan) SNC-Lavalin Group (Canada) J. Ray McDermott (USA) JGC Corporation (Japan) Hyundai Heavy Industries (South Korea) Foster Wheeler (USA) Daelim Industrial Company (South Korea)
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EPC Companies Who Matter..Contd
Fluor, Foster Wheeler, Shaw Group, Jacobs, 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.
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Projects Today
1. 2.
Nassiriya Oilfield (Iraq) Integrated Gas Development Project (UAE) South Pars Gas Field (Iran) Jubail Export Refinery (Saudi Arabia) Tianjin Petrochemicals Complex (China) Touat Gas Field (Algeria) Gassi Touil Gas Field (Algeria) Skikda Refinery Upgrade (Algeria) Sipchem Polyvinyl Plants (Saudi Arabia) Borouge (UAE)
3. 4. 5.
6. 7. 8.
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9.
10.
Projects Today
1. 2. 3. 4. 5.
6. 7.
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8. 9. 10.
Trans Sahara Pipeline Al-Shaheen Refinery Nabucco Pipeline Yanbu Export Refinery Khalifa Point & Fujairah Refineries Jubail Export Refinery Integrated Gas Development Abu Dhabi Crude Oil Pipeline Kuwait Oil Co drilling platforms Oman oilfield services contract
Thank You
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EPC Analysis

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EPC Analysis

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

Fixed Price Contract Economic Benefits

EPC Contract Fundamental: Some Questions

Graphs and Figures

EPC Contract Execution Risks: Owner Contractor Interactions

EPC Contract: Advantages Fixed Price Contract, Negligible Escalation

EPC Contract Fundamental: Some Questions

EPC Contract Fundamentals: Some Questions

EPC Contract Fundamentals: Contracting Strategy

EPC Contract Fundamentals: Contracting Strategy Contract Performance Risks

EPC Contract Fundamentals: Contracting Strategy Contract Performance Risks

EPC Contract Fundamentals: Contracting Strategy Contract Performance Risks

EPC Contract Fundamentals: Contracting Strategy Contract Performance Risks

Revenue Profile Rebased to 1 for a Typical EPC Contract

Typical Amplification of Execution Risk As EPC Contract Progresses

Typical Amplification of Execution Risk With Cost Plus Contract

Relative Risk Reward Profiles of Different Contract Strategies

EPC Contract Execution Owner Contractor Interactions: Owner Demands

EPC Contract Execution Owner Contractor Interactions: Contractor Pressures

EPC Contract Execution Owner Contractor Interactions: Consequences

EPC Contract Execution Owner Contractor Interactions: Disputes

EPC Contract Execution

EPC Contract Execution Owner Contractor Interactions: Disputes Possible Reasons

EPC Contract Risk Assessment and Mitigation During Economic Meltdown.

Economic Downturn and Macro Impacts: The Six Factors

Economic Downturn and Macro Impacts on GDP Growth

Economic Downturn and Macro Impacts on Global Equities

Economic Downturn and Macro Impacts on Manufacturing

Economic Downturn and Macro Impacts on Industrial Production

E&P IHS/CERA Upstream Capital Costs Index

Risk Analysis Mitigation Insurance

Risk Analysis Mitigation Risk Transfer Instruments

The Projects Affected During Transition

Total cost: $114.5 billion

EPC Companies Who Matter

EPC Companies Who Matter..Contd

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