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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Many of the books on construction risk management concentrate on theoretical approaches to the accurate assessment of the overall risks of taking on a new project. Less attention is paid to the typical risks to which the operational level of a project is exposed and how operational managers should approach those risks during project implementation. This book identifies precisely where the major EPC/Design-Build risks occur within an operational framework and shows how best to deal with those risks. The book attempts to offer practical advice, approaches and tools for dealing with risks to which the various operational departments are exposed.
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Veröffentlichungsjahr: 2020
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Table of Contents
Cover
Foreword
Preface
Acknowledgements
Chapter 1: Introduction
1.1 The Book's Focus and Objectives
1.2 The Book's Content and Structure
1.3 Generality of Contractual Advice Given
1.4 Common Elements for Construction Projects
Notes
Chapter 2: Construction Project Implementation Routes
2.1 Different Approaches
2.2 Traditional Contracting Approach
2.3 Design-Build Approach
2.4 EPC Approach
2.5 EPCM Approach
2.6 Employers Prefer Lump-Sum Contracts
2.7 Fixed-Price Lump-Sum Contracts
2.8 Selecting the EPC Contractor
Notes
Chapter 3: EPC Project Risk Management Overview
3.1 Project Risk Management – Definition
3.2 Construction Project Hazards Abound
3.3 Importance of Project Risk Management
3.4 Corporate Risks Versus Project Risks
3.5 Greater Risks for EPC Contractors
3.6 Principal Disaster Areas on EPC Projects
3.7 Maintaining the Project Schedule
3.8 Departmental Interface Issues
3.9 Forging an Integrated Implementation Team
3.10 Allocating Responsibility for Handling Risks
Notes
Chapter 4: EPC Project Pre-Implementation Problems
4.1 Bidding Process Pitfalls
4.2 Failure to Embrace Lessons Learnt
4.3 Failure to Understand Contract Terms
4.4 Qualifications, Deviations and Exceptions List
4.5 False Management Resourcing Plan
4.6 Underestimating the Costs
4.7 Conceptual Design Bid Pricing Problems
4.8 Agreeing to Inadequate Completion Time
4.9 Reliance on Employer's Information/Data
4.10 Late Approval of CDVR
4.11 Gateway Between FEED and Detailed Design
4.12 Extended Review Period for Deliverables
4.13 Objecting to Impractical Review Process
4.14 Underestimating Equipment Procurement Packages
4.15 Rejection of Country of Origin
4.16 Responsibility for Governmental Problems
4.17 Performance Bond Early Submission
4.18 Requirement for On-Demand Bonds
4.19 Import Duty Responsibilities
4.20 Local Content Obligations Downplayed
4.21 Contractor's Bid Modifications Ignored
4.22 Relying on Carrots
4.23 Square Pegs and Round Holes
4.24 Failure to Check the Margin
Notes
Chapter 5: Overseas EPC Project Preparatory Work
5.1 Critical Path Identification
5.2 Setting Up Contractor's Administrative Systems
5.3 Determining Appropriate Management Structure
Notes
Chapter 6: Project Roles, Functions and Responsibilities
6.1 The Project Management Consultant
6.2 The Board of Directors
6.3 The Project Director
6.4 The Project Manager
6.5 The Project Controls Manager
6.6 The Project Controls Department
6.7 The Planning/Scheduling Team
6.8 The Engineering Manager
6.9 The Procurement Manager
6.10 The Expediting/Logistics Manager
6.11 The Construction Manager
6.12 The Commissioning Manager
6.13 The Operational Readiness Manager
6.14 The QA/QC Manager
6.15 The HSE Manager
6.16 The Camp Boss
6.17 The Project Information Manager
6.18 The Document Control Manager
6.19 The Information Technology Manager
6.20 The Interface Manager
6.21 The Contract Administration Team
6.22 The Human Resources Manager
6.23 The Administration Department
6.24 The Financial Management Team
6.25 The Compliance Team
6.26 The Legal Department
Notes
Chapter 7: Reducing Joint-Venture/Consortium Risks
7.1 Joint Venture Versus Consortium
7.2 JV Considerations
7.3 Setting Up a JV Steering Committee
7.4 Objectives of JV Steering Committee
7.5 JV Members are Partners
Note
Chapter 8: Claims Management Risks and Problems
8.1 Relying on Claims to Achieve Profitability
8.2 Factors Legislating Against a Claim's Success
8.3 Key Ingredients for Worthwhile Claims
8.4 Proving Excusable Delay
8.5 Key Components of Successful Claims
Notes
Chapter 9: Identifying Hazards and Managing the Risks
9.1 Introduction
9.2 Potential Hazards for Construction Projects
9.3 Responsibility for Project Risk Assessment
9.4 Identifying and Managing Project Risks
9.5 Project Main Risks Register
9.6 Risk Assessment Team Inputs
9.7 Relative Risk Factor Assessment
9.8 Risks Arising from Safety Studies
9.9 Dealing with Safety Risks to On-Site Personnel
9.10 Dealing with Health Matters for On-Site Personnel
9.11 Dealing with Risks to the Environment
Notes
Attachment A: Matrix of Project Risk Areas and Corresponding Risk Management Solutions
Attachment B: Matrix of Prime Risk Considerations, Impacts & Consequences
Attachment C: Example Project Main Risks Register
Attachment D: Steps in Task Risk Assessment
Attachment E: Task Hazard Assessment Worksheet
Appendix A: Abbreviations and Acronyms
Appendix B: Glossary
Notes
Appendix C: EPC Project Management Team Organisation Structure
Appendix D: EPC Project Departmental Organisation Structure
About the Author
Index
End User License Agreement
List of Illustrations
Chapter 6
Figure 6.1 Interfaces for EPC Project's Departments and Teams.
Guide
Cover
Table of Contents
Begin Reading
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Practical Risk Management for EPC/Design-Build Projects
Manage Risks Effectively – Stop the Losses
Walter A. Salmon
FRICS MAPM MACostE
This edition first published 2020
© 2020 John Wiley & Sons Ltd
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Foreword
Within any jurisdiction there are cyclical deviations in the type of and investment in major projects that are driven by investment priorities, political mandates and corporate strategies. However, at a global level there has, and will continue to be, huge investment. In 2018, the investment in major projects was around $4 trillion and, by all accounts, this investment will increase significantly year on year in an attempt to service the world's rapidly expanding population.
The procurement method on these projects varies but, in the main, the risk of both design and construction is passed to the contracting team either through a design and build, EPC or an EPC variant framework. That is all well and good, but the reality of the procurement process is that there is often a total disconnect between those that draft the contract and those that deliver the project. The contract is the single most important document on a project and in theory creates a platform of certainty, allowing those parties to it to organise and plan. However, so much of the focus in contracts is on risk allocation and risk consequence. If one asks lawyers the sorts of things that are most important on a major project, they will say things such as limitation of liability, price, termination rights and so on. However, if one asks the project team what things are most important, they may say things like reaching and maintaining a consensus around scope, having clarity as to the responsibility of the parties and good communication lines. In other words, in the eyes of the project team, what drives success in projects is about relationships and underlying governance, not management of risk consequence.
I know of a number of very good books on the subject of EPC contracts and major projects, but by and large these are written by lawyers for lawyers, and so the focus tends to be on the sorts of legal issues I identified above, sometimes with practical advice obtained vicariously. The unique offering of this book is that it purposefully focuses away from contract interpretation and legalese towards navigating the reader through a path to understanding the issues and solutions on live projects from the perspective of someone who has been there and seen it many times over. The author's experience, working for over 40 years at the centre of major projects across various sectors for some of the world's biggest companies, has been methodically and logically distilled into a treasure chest of wisdom. The book clearly sets out his understanding and interpretation of risk and putative problems. It explains in great detail all of the key roles on major projects and how those roles can and should interface successfully. Throughout the chapters, it offers practical tips and guidance for navigating a route to a successful project, or placing the contractor in the best possible position when problems arise.
The book will be of great use to contractors, project managers, employers and lawyers. It provides insight for those responsible for managing projects, those who wish to properly understand the various roles, interfaces and risks that need to be considered, and to lawyers who wish to gain a better understanding of how major projects operate and what adjustments to drafting might be taken, or live project advice might be given, to avoid or mitigate risk. If even part of the guidance given in this book is put into practice, I have little doubt that the incidence of disputes would dramatically reduce, as would the negative impact of risks on the contractor's profitability.
James Pickavance
Partner – Jones Day
Preface
The idea for me to write this book came about from the many questions I received from colleagues when I was assisting Project Managers in the compilation and updating of the Risks Registers for the primary risks particular to their Engineering, Procurement and Construction (EPC) Projects. At the same time, I was often involved in chairing the Risk Management Meetings on behalf of those Project Managers, and then following up the required actions with my colleagues. My participation in those tasks came about despite my principal role having been to undertake the contract administration functions for the mega EPC Projects I had been allocated to. This was simply because most other managers seemed to believe that risk management was more suited to my line of work than theirs. In the course of undertaking those tasks, some of my co-workers from whom input was required told me that the concept of risk management was a mystery to them, and it was therefore a subject that they shied away from. I had a fair degree of sympathy for them, largely because, when I first embarked on studying the subject of project risk management in the mid-1980s (as part of a project management course I was undertaking in pre-internet days), I was overwhelmed by the almost pure academic treatment of the subject (as compared with the practical application I had been looking for). Sadly, I find that this is still the case today, as my research on the internet has revealed.
Even sadder is the fact that, despite the initial great hopes for the EPC Project approach, many of the completed mega projects failed to make the profit level that the contractors had anticipated, and a great number of such projects ended in financial disaster for the contractors involved. My base discipline of quantity surveying, coupled with the contract/claims administration and risk management work I undertook, provided me with the ideal standpoint to see where and why things had gone wrong financially on the projects I had been directly associated with. I also observed the same problems occurring with monotonous regularity from one project to the next. My analysis of the countless loss-making issues I had to deal with led me to conclude that the vast majority of problems occurred for the same basic reason. Simply put, many people whose responsibility it had been for handling the work effectively were not fully aware of all the risks involved (or the fact that it was their direct responsibility to take care of such risks). Because of that, they had not taken steps to ensure that suitable mitigation plans were put in place to prevent those risks turning into ugly problems.
In principle, managing construction projects well is predominantly all about the contractor applying common sense, but it quite obviously is nowhere near as easy as that may sound. As I was in the throes of writing this book, news of the demise of Carillion plc came through (it went into compulsory liquidation on 15 January 2018). That undoubtedly sent shivers down the spines of a number of other large contractors across the globe. Almost certainly, it was the improper handling of the day-to-day major risks by the senior management team that brought Carillion down, and which was therefore a highly preventable outcome. In the construction industry, such disasters are rarely brought about by sudden unexpected events. I am sure that the Carillion management team applied common sense in their business, but I am equally sure that it could not have been applied 100% of the time, and certainly not to the most important risks.
Today, the term ‘operational excellence’ is very much in vogue, and most likely the Carillion management team also thought they had that subject cracked. However, I consider that, without attention being paid to excellence in risk management at all levels, meaningful operational excellence will remain a pipedream for most contractors. I therefore decided that it was perhaps time I put down my findings in a book, based on the experience I have gained over the last 20 years working on EPC Projects, about where the major risks lie for the EPC/Design-Build contractor, and how best to handle those risks. My primary objective was simply to try to help put the profit back into EPC and Design-Build Projects for the benefit of those contractors who are struggling with that issue.
This book is not aimed at Tier-1 contractors (because otherwise I would quite rightly be accused of trying to teach a grandmother to suck eggs). Rather, my target audience is mid-range construction companies and their individual managers (or aspiring managers, still learning the ropes) who would like to see a comprehensive overview of where the major risks lie in wait for them on EPC/Design-Build Projects. Many such contractors are way off being Tier-1 standard operators. However, I have met many contractors' directors who think their respective companies have made it to the big league when, in reality, their companies still have a long way to go before they could be considered to be leaders in their field. If any contractor is experiencing the situation where too many of the problems outlined in this book are regularly occurring in their organisation, then I would suggest that some urgent training/re-training is needed for their management teams.
The many different standard forms of contract used in the construction industry (as well as all the bespoke contracts I have seen) incorporate certain key words/terms as proper nouns. In an attempt to make the technical content of this book as easy as possible to read, I therefore chose to use those same words/terms in capitalised form, as well as add in a few extra words/terms of my own. Further, for the purpose of ensuring clarity, I tried not to use too many ad-hoc abbreviations in the body of the book (e.g. after the first appearance of the title ‘Engineering Manager’ it could thereafter have been replaced throughout with the initials ‘EM’). Instead, due to the huge number of personnel and technical terms involved in the construction industry, I have chosen to write the words out in full in most cases. The primary exception is, of course, the term ‘EPC’. The other exceptions occur in situations where a name/title repeats many times within the same passage/section or where the abbreviation is also very well known (such as ‘HR’ for Human Resources, ‘HSE’ for Health, Safety and Environment, and ‘QA/QC’ for Quality Assurance and Quality Control). The reasons for taking this approach were simple enough:
When compiling the draft of this book, I invited comments from various close colleagues working in the construction industry. Almost every person opted to go first to the section that dealt with their specific discipline and, on a number of occasions, I was asked what certain of the abbreviations meant. That is when I realised that many readers may also do that and, if they are faced with a swathe of abbreviations they do not recognise, then their appreciation of the content could be somewhat diminished.
I have also observed that abbreviations remain fresh in a reader's mind for only a short time, and it can become very irritating to have to flip back to be reminded what they mean, since it can often reduce the impact of what is being read. However, for the sake of good order, I have included in
Appendix A
(Abbreviation and Acronyms) a full list of the abbreviations and acronyms I have used. I have also provided, in
Appendix B
(Glossary), some extensive definitions of certain of the key technical and other terms used in this book.
If what I have written helps those responsible for running EPC Projects to manage the risks better and make more money for their efforts, then I will have achieved my principal objective. If I have also inspired readers to embrace the concept of project risk management more enthusiastically, that would be an added bonus, not just for me but for the construction industry at large.
Walter A. Salmon
Acknowledgements
The sterling efforts of my friend of 35+ years, Mr Allan Maxwell, are hereby acknowledged, whose input in the middle stages of my writing was invaluable, since it contributed substantially to the improvement of the content. Not only that, Mr Maxwell's positive comments and encouragement provided me with the impetus I needed to soldier on and complete the manuscript. A number of other colleagues have also been very helpful in providing comments and suggesting improvements over the two years plus it has taken me to complete the manuscript, not the least of whom is Mr Shahnawaz Aziz; my heartfelt thanks go to all of them, too numerous to mention.
My daughter, Anita Salmon, also earned my gratitude for her dedication and patience in carefully working her way through my initial drafts in order to clean up my grammar and correct other obvious errors. As a lay person, she also raised many valid questions that enabled me to ensure my content was a lot clearer than it otherwise would have been.
In conclusion, I would also like to thank Mr James Pickavance (former Partner at Eversheds Sutherland, UK) for having taken the time to review what I had written, for providing very useful comments/encouragement along the way, and for being kind enough to write the Foreword for this book.
Chapter 1Introduction
1.1 The Book's Focus and Objectives
I feel obliged to make it clear, right from the outset, exactly what this book is about and, just as importantly, what it is not about. My primary focus is on how best to deal effectively with the risks to a Contractor's profitability that sit within the various departments engaged on ‘EPC Projects’ for major construction work (where EPC stands for ‘Engineering, Procurement and Construction’). My usage of the term ‘construction work’ in the previous sentence is intended to cover building, civil engineering and industrial engineering work of every kind, as envisaged in the ICMSC's ‘Global Consistency in Presenting Construction Costs’.1 However, I have not attempted to distinguish in this book between different types of construction work or industries, since I consider that the same basic risks apply to all EPC Projects (and also to Design-Build Projects).
Within this book I set down where I have observed poor management or outright mismanagement occurs at the manager and department levels on lump-sum EPC and Design-Build overseas projects (i.e. construction work outside the home country of the Contractors involved). Such poor performance results in large financial losses for the Contractors and, sometimes, embarrassing consequences (such as loss of reputation). This book also deals with major risks that can be imposed on projects that originate from outside the Contractor's own Project Management Team, such as the acceptance by the Contractor of onerous contractual provisions that really should have been avoided.
As the sub-title of this book indicates, my focus is very much about how Contractors can manage risks better and thereby stop certain types of losses occurring on their EPC/Design-Build Projects. I am fully aware that the materialisation of a major risk can have other dire consequences for a Contractor that go beyond money, but most other risks can be insured against or overcome by the application of good public relations efforts. The one risk that cannot be insured against in the contracting business is going bankrupt because of financial mismanagement. Of course, insurance coverage for a company's management personnel is readily available to protect them against allegations of mismanagement (through Director and Officers Liability Insurance, for example, as explained by Construction Executive).2 However, such insurance does not offer compensation to the Contractor for the company's losses that occur through financial mismanagement.
In the course of writing this book, I received a few negative comments from some people about the ‘secondary’ subject matter (managing risks effectively to stop losses). They mainly agreed with the concept of advising Contractors as to how best to deal with the risks attaching to construction projects, but thought that my focus on ensuring profitability was too commercial in today's climate. I even received one comment that ‘business is about much more than just making a profit’, which was said as if making losses was a virtue. However, I make no excuses whatsoever for concentrating on how Contractors should make more money and ensure their profitability by managing risks better. If anybody does not believe that making a profit is critical to businesses, they should try asking the views of the stakeholders of Carillion plc, including the tens of thousands of workers who lost their jobs when Carillion's business folded. It seems that close on 30 000 suppliers and subcontractors were still owed roughly £2 billion by Carillion at the time of its collapse.3
I have deliberately not attempted in this book to cover the risks inherent in ‘reimbursable’ construction contracts (sometimes referred to as ‘cost-plus’ contracts). Had I not adopted that path, I believe it would very much have confused my message as to where losses occur on lump-sum EPC/Design-Build Projects. The simple fact is that many of the risks that could lead to substantial losses on lump-sum contracts are usually opportunities to make more money under the reimbursable contract situation.
I have also not attempted to deal with too many other aspects beyond managing the major project risks encountered by construction companies when undertaking EPC/Design-Build Projects (i.e. I have as much as possible avoided dealing with the corporate risks). Most certainly therefore, this book does not attempt to provide advice as to ‘How Best To Run Your Construction Company’. Instead, my primary objectives in writing this book were simply to show:
what I have found to be the major loss-making risks for lump-sum EPC/Design-Build Projects;
whose responsibility I consider it is for preventing those risks from materialising into problems; and
the best mitigation methods I suggest should be adopted to prevent those risks materialising.
A large proportion of the publications I have read about how Contractors should implement sound risk management dealt predominantly with corporate risks, with the subject matter treated in a very generalised fashion. Most writers had not divided the subject up into digestible chunks or split the responsibilities clearly between the different Departments accountable for the required task inputs. Nearly all such publications also tended to concentrate on the various theoretical approaches available for assessing the overall risks of taking on a new Project. Very little had been written as to what the typical risks are in respect of the specific workloads of each individual Department, or how the complement of various Managers should best work together to handle those risks during Project implementation. As a result, I considered those publications were generally not specific enough to be truly useful for a Contractor's Corporate Managers, Project Managers and Department Managers. This book was therefore written in an attempt to fill the gaps and resolve the shortcomings I had observed.
It will be seen that there is a distinct lack of academic and theoretical content in this book, which was another deliberate decision I made. This was because my intent was to present a document that contained predominantly practical content that could be applied with immediate effect in the workplace on a daily basis. It is not that I object to applying academic principles to Project Risk Management – far from it. It is just that the aim of this book is to focus on practical matters. Anybody wishing to research the various theoretical approaches that can be applied to Project Risk Management can do so by following the references I have supplied within this book (and which I believe would help them to undertake further worthwhile detailed research of their own).4
I do not pretend that the advice in my book is intended to be a balanced document equally reflecting the interests of both parties to an EPC or Design-Build Contract (i.e. both the Employer and the Contractor). On the contrary, I have written primarily for the benefit of Contractors. I have therefore deliberately avoided mentioning situations where the Employer could take advantage of the Contractor. Having said that, nowhere do I make any suggestions that amount to the Contractor ripping off the Employer; but putting the Contractor into a legitimately stronger position, most certainly ‘yes’. The purpose of my book is simply to show where managing the risks better will prevent unnecessary losses for the Contractor. Of course, nothing prevents a member of the Employer's Team from reading this book, learning where the Contractor is most likely not to be managing risks properly, and then using that knowledge to defeat the Contractor's claim for extra time and/or money. The way for Contractors to overcome that problem is for them to sharpen up their Project Risk Management capabilities.
I included the term ‘Design-Build’ in the title of this book, since I consider that there are only subtle differences between how EPC Projects and Design-Build Projects are set up and run. The reality is that the risks I cover in this book can apply equally to both types of Project since, under each of the different arrangements, the responsibility for the design work (as well as the procurement and construction work typical to all construction Projects) falls to the Contractor. I have therefore opted in later chapters not to repeat the term ‘Design-Build’ unless I felt it was particularly necessary to do so.
In an effort to deal with most of the major problems that could be encountered, I have taken into consideration the worst-case contractual scenario I can think of in respect of the risks that a Contractor could possibly face in undertaking an EPC Project. That is where the Contractor is required to submit a lump-sum bid for an overseas Project in a developing country for a specialised process plant (such as an oil refinery), in the situation where the Invitation to Bid documentation issued by the Employer comprises only:
an incomplete Conceptual Design;
an outline Functional Specification that requires finalisation during the bid negotiation phase (i.e. no detailed specifications are provided);
a preliminary Plot Plan (i.e. not a fixed layout) that likewise needs to be firmed up in the bid negotiation period;
a mixed complement of loosely coordinated technical and administrative requirements that contain many references to third-party standards that sometimes conflict with each other; and
a set of contractual requirements that are heavily biased in the Employer's favour.
The foregoing list of inadequate documentation is a far cry from that which the International Federation of Consulting Engineers (more commonly referred to as ‘FIDIC’) envisages for EPC Projects (i.e. detailed, specific Employer's Requirements are expected as a norm).5 However, I have personally experienced working on and resolving the problems for Projects where one or more of the above inadequacies occurred (and one Project where they all occurred), although I am not at liberty to identify those Projects here. I am, however, certain that such unfairly and awkwardly constructed Projects will keep appearing, just as long as there are Contractors around who are desperate for whatever work they can get their hands on in the location they wish to build their future in.
I have had a number of people who have read some of my observations of where things went wrong on construction projects say words to the effect of ‘it's just bad management’, as if telling people to employ ‘good management’ would have miraculously cured the problems I encountered. My stance is that the many people I observed suffering the negative effects of their own poor management were usually completely unaware of what they had done wrong (or had failed to do correctly). Knowing that you have to employ good management is very different from knowing what good management is. The purpose of this book is therefore to divulge what I myself have seen go wrong, and to offer my advice as to how such situations could have been handled better. My hope is that this will lead to sound Project Risk Management being put into practice more often.
1.2 The Book's Content and Structure
I wish to stress that the core content of this book is to be found in Chapter 6 (Project Roles, Functions and Responsibilities), which sets out, over the course of 26 sections, what I consider the Contractor's key management personnel must do (or avoid doing) in order to ensure the success of a Project. However, before launching into the detailed nitty-gritty of Project Risk Management for EPC Projects at a practical level, I feel that there are a number of important matters that need to be aired and/or straightened out first. This is largely because I have received a lot of negative comments over the years from people in the construction industry about the EPC/Design-Build concept of Project implementation. Very often, such comments came from those who had little or no experience of what is involved, so their negative comments were perhaps not surprising.
The principal negative comments against the EPC approach I received were as follows:
Too many Contractors working on EPC Projects have failed miserably to achieve the time and cost objectives. As McKinsey & Company found in 2017, Project durations have often been horribly extended and the final costs have quite regularly far exceeded the original budgets.
6
(This does not appear to be as big an issue for Design-Build Projects, perhaps because their application is often to much smaller undertakings (private residences being an example). Such Projects are also often carried out by highly specialised teams with tried-and-tested technology [for example, cold storage building contractors, swimming pool installers and prefabricated building suppliers]. In such cases, the risk sharing between the Contractor and the Employer seems to be much more evenly balanced than on EPC Projects [especially when compared to the fixed-price, major turnkey ones], as was observed by Banik and Hannan.7)
The Contractor is responsible for and has complete control over at least the detailed design work, and may therefore be tempted to skimp on the quality of the finished facility wherever it seems possible to get away with doing that.
The Employer is not able to exercise control as to which Subcontractors or Vendors are selected for the Project. This is contrary to what is often done under the Traditional Contracting approach, where it is very common for the Employer to appoint such third parties and directly contract with them (thus giving the Employer a great deal of control over those entities).
I have to say that the foregoing concerns are not unrealistic. However, there are ways in which an Employer can exercise control over each of those issues to get what every Employer requires from a completed construction development of any size, namely:
safe completion of the Project on time and within budget, and
a first-class facility that fully meets the functional, operational, performance, reliability, availability, maintainability, and safety requirements.
To demonstrate that an EPC/Design-Build approach is every bit as worthwhile and valid from an Employer's point of view as the Traditional Contracting route, I have therefore included extensive notes about the traditional procurement approach to Project implementation, and contrasted those with both the EPC and Design-Build procurement routes. These details can be found in Chapter 2 (Construction Project Implementation Routes) and Chapter 3 (EPC Project Risk Management Overview). I have also provided a substantial amount of background detail about EPC Projects in particular: both Chapter 4 (EPC Project Pre-Implementation Problems) and Chapter 5 (Overseas EPC Project Preparatory Work) deal with different aspects of this topic.
For those who consider that they fully understand the ins and outs of the different contracting arrangements covered therein, Chapter 2 may be considered to be not so useful, and some readers may even choose to skip directly to Chapter 6. Nonetheless, I venture to suggest that Chapters 3, 4 and 5 are worth a read by anybody responsible for putting bids together, or who wishes to know where things can often go very wrong before implementation of the Project begins to get underway.
My approach in Chapter 6 has been to pinpoint, from my standpoint, the appropriate Manager to whom the responsibility for identifying and managing each specific risk should rightly fall, in line with the thinking displayed by the Association for Project Management (APM).8 I have therefore written this book as if there is only one way to organise the corporate structure and allocate Project responsibilities within a construction company. No doubt that will make my work subject to a certain amount of criticism, notwithstanding that I took that approach in full recognition of the fact that there are many different schools of thought as to how construction companies and Projects should be organised. My thinking was that, no matter how a company organises its Corporate Management Team or deals with the management of its Projects, it is not possible to remove either the corporate risks or the project risks; they will always remain, and the only things that will change from one company to another are:
upon whom the responsibility for managing each risk falls,
how the importance of each risk is perceived, and
how each risk is to be handled.
I also considered that, if there is no clear organisational framework or management structure established, then the principles of Project Risk Management I mention could be deemed to apply to different roles/functions within the organisation. However, I intended to pin down with a greater degree of certainty what the risks are and which person is properly responsible for managing each risk (in my opinion, of course). Thereafter, having seen how I have applied the risk management principles to the preferred structure I have chosen to follow, others with differing views can then adapt those principles to accord with their own preferences for how their companies and Projects should be organised. In order to make it clear as to what management structure I am working to, Appendix C shows the ‘EPC Project Management Team Organisation Structure’ I have employed andAppendix D shows the ‘EPC Project Departmental Organisation Structure’ I have adopted.
To round out and complete the subject of Project Risk Management, I have also included three further Chapters, namely: Chapter 7 (Reducing Joint-Venture/Consortium Risks), Chapter 8 (Claims Management Risks and Problems) and Chapter 9 (Identifying Hazards and Managing the Risks).
I had intended that construction industry students/newcomers should also be able to find the content of this book useful. In view of that, I am compelled to add the caution that the management structure I have adopted herein (for both the EPC Project team and the Contractor's company) must not be considered to be written in stone. It simply provided a means for me to allocate roles and functions/responsibilities in a structured manner, in an effort to ensure that I did not miss out discussing any key area of management. It therefore needs to be recognised from the outset that, within different companies, some of the functions/responsibilities I have allocated to a particular Manager may well be allocated to another Manager. Nonetheless, my hope is that my approach will enable those who have not had experience occupying or dealing with certain of the various management positions to be able to appreciate more fully what it takes to run an EPC Project efficiently and effectively. Ultimately, if all this book achieves is to encourage more discussion about the practical application of Project Risk Management in the construction industry (and for EPC and Design-Build Projects in particular) then I will consider that I have done some good, regardless of any flak that may come my way.
1.3 Generality of Contractual Advice Given
There are a number of standard forms of contract that deal specifically with lump-sum EPC/Design-Build Projects. For example:
the FIDIC Silver Book (‘Conditions of Contract for EPC/Turnkey Projects’),
9
the FIDIC Yellow Book (‘Conditions of Contract for Plant and Design-Build’),
10
the ‘ICE Conditions of Contract Design and Construct’,
11
and
the IChemE ‘Lump Sum Contract – The Red Book’.
12
However, International Oil and Gas Companies (such as BP, ExxonMobil, Gazprom, Lukoil, Petronas, Royal Dutch Shell and the like) commonly use (and will no doubt continue to use) bespoke contracts that have been tailored to the individual needs of each respective company. The use of such custom-compiled contracts is primarily because the standard forms of contract would need to be substantially modified to incorporate all the special requirements particular to each of those organisations.
In view of the above, the advice I give in this book has not been developed with reference to any specific standard forms of contract. In turn, that means that I have not attempted to deal with any of the particular terms and conditions that are found in the standard forms. I prefer to leave that to lawyers and, in any case, those topics are covered more than admirably in a number of well-known books.13 However, I have tried to identify as many as possible of the uglier (unfair/one-sided) clauses that work their way into many contracts, whether the base document is one of the standard forms of contract or a bespoke contract.
1.4 Common Elements for Construction Projects
Construction work is ever present amongst us, whichever direction you care to look, taking on many different forms. Construction activities range from major city redevelopments to petrochemical plants, and with so many things in between; the list of possible construction work seems endless. And the Construction Industry is simply huge. For infrastructure work alone, according to McKinsey & Company the value anticipated to be undertaken worldwide over the period 2018–2023 is in the order of USD 77 trillion.14
There are many steps that need to be taken first before even one spade can strike the ground in earnest to commence the physical on-site work for a major Project. For most Projects, a feasibility study will need to be conducted before the Employer will be prepared to commit the necessary resources to proceeding with the implementation activities. A typical feasibility study will address the questions of the legality of the proposed Project and whether its construction would be technically feasible, as well as being fully justified on economic grounds. It is not usual for a Contractor to be involved in ascertaining the viability and feasibility of a Project unless the Contractor is required to be involved in organising and/or providing the finances. This requirement can sometimes be necessary under an EPC Contract if payment to the Contractor is not due to be made until a number of years after the facility has been operating. It is most certainly required in Projects where the Build-Operate-Transfer (BOT) concept is employed.15 BOT Projects may also be implemented under an EPC arrangement. The problems for some Projects can start with an inadequate feasibility study, which can then lead to severe cash flow problems for the Employer (and, ultimately, the Contractor). To avoid the possibly disastrous problems that an inadequate feasibility study can cause, it has been proposed by some (see Hyari and Kandil) that a series of peer reviews should be conducted of all feasibility study material.16
There are many different ways for an Employer who wants to have construction work carried out to arrange for the appointment of a Contractor to do the work. However, whether the work is let under a Traditional Contracting arrangement or an EPC/Design-Build arrangement, the Contractor's work will almost certainly involve both procurement and installation/construction work. It will therefore be of no surprise that a great deal of what I have written will quite obviously also apply equally well to non-EPC/Design-Build Contractors, despite the intended focus of this book being on EPC/Design-Build Projects.
Whether or not a Project is conducted under an EPC or Design-Build arrangement, failure to manage the implementation risks properly for a major Project can lead not only to huge financial losses but also to bankruptcy for the Contractor's entire business. Mismanaging a major Project's risk portfolio should therefore be viewed as a gamble too far for most Contractors, and advance planning is therefore vital. Consequently, no matter what type of contractual arrangement the successful bidder will eventually be working under (whether the Traditional Contracting approach or an EPC/Design-Build route), there are certain basic preparatory bidding steps that need to be taken. The following sets out what those steps are, and which are essential if the bid pricing is to stand a good chance of adequately covering all the costs involved for undertaking all the work necessary to complete the Project successfully:
Planning how the work will be done through the development of a comprehensive
Work Breakdown Structure
(
WBS
) for the Project. Sometimes the starting point might be an outline WBS required/prepared by the Employer's Team and issued with the Invitation to Bid documentation. No matter, the WBS needs to be worked up into a truly meaningful list of all the work activities/elements involved and, under an EPC or Design-Build Project, the Engineering, Procurement and Construction components should each have their own list of work activities/elements clearly identified under those specific headings.
Using the completed WBS, the Contractor must then establish the sequence of undertaking the work activities/elements involved, and also determine the length of time needed to deliver the completed work for the entire Project (the Project Schedule). If it is also possible to establish the labour and construction equipment resources required reasonably accurately, then that would be of great benefit, since it would help to give more confidence in both the anticipated Project completion time and the Contractor's bid pricing. However, that is more often than not very difficult to achieve under an EPC/Design-Build Project, due primarily to the lack of detailed design information available from which to measure the physical work quantities that will be required for the completed Project.
Having prepared the WBS and established what the Project Schedule looks like, the Contractor must then conduct a preliminary risk analysis. The aim should be to establish what the major risks are that, if not controlled adequately, would have the potential to cause major problems and thereby stop the Project from being as successful as it could be. Those risks should then be set down in a preliminary Project Main Risks Register, alongside which suitable risk mitigation measures should be included (wherever it is considered possible/feasible to achieve that), aimed at preventing those risks from materialising.
The final essential ingredient in submitting a worthwhile, comprehensive bid is for the Contractor to prepare an outline
Project Execution Plan
(
PEP
) that incorporates all the findings from the WBS, the Project Schedule and the Project Main Risks Register. A properly prepared and well thought out PEP is, in essence, the storyline for how the Project will be undertaken. If written competently, the PEP would allow the Contractor's Project Implementation Team to form a very clear picture as to what the most effective management set-up ought to be. That too would give the Contractor added confidence about the adequacy of the bid pricing.
All of the above topics, common to all construction Projects (EPC/Design-Build or otherwise), are dealt with in far more detail in the following chapters of this book, along with advice as to (i) what to look out for when compiling the necessary information and documentation, (ii) what things can go wrong, and (iii) how to avoid such problems occurring.
Notes
1
International Construction Measurement Standards Coalition (2017).
International Construction Measurement Standards – Global Consistency in Presenting Construction Costs
, 1e. International Construction Measurement Standards Coalition, p. 7.
2
Construction Executive (16 April 2014).
Understanding D&O liability insurance coverage
.
www.constructionexec.com/article/understanding-do-liability-insurance-coverage
(accessed 21 March 2018).
3
Strategic Risk (15 October 2018).
Carillion collapse: the lessons learnt in supply chain risk
. Newsquest Specialist Media Limited.
www.strategic-risk-europe.com/carillion-collapse-the-lessons-learnt-in-supply-chain-risk/1428293.article
(accessed 16 October 2018).
4
I consider that a good starting point would be the APM (Association for Project Management) publication ‘Project Risk Analysis and Management Guide’ (PRAM Guide).
5
Fédération Internationale des Ingénieurs-Conseils (FIDIC) (2017).
Conditions of Contract for EPC Turnkey Projects
,
2e. Fédération Internationale des Ingénieurs-Conseils/International Federation of Consulting Engineers.
6
Banaszak J., Palter R. and Parsons M. (March 2017).
Stopping the insanity: Three ways to improve contractor-owner relationships on capital Projects
.
www.mckinsey.com/industries/capital-Projects-and-infrastructure/our-insights
(accessed January 2018).
7
Banik G.C. and Hannan F. (2008).
Specialty Contractors' Perspectives on Risk Importance and Allocation of Design-Build Contracts – Abstract
(School of Architecture, CET and Construction Southern Polytechnic State University).
8
Association for Project Management.
APM PRAM Guide
. Association for Project Management, p. 98: ‘Risks are more likely to be acted on if responsibility is allocated to individuals’.
9
FIDIC – Fédération Internationale des Ingénieurs-Conseils.
10
Ibid.
11
Published by ICE Publishing (part of the Institution of Civil Engineers).
12
Published by the Institution of Chemical Engineers.
13
Such as, but by no means limited to,
Hudson's Building and Engineering Contracts
(by Hudson A.A. and Wallace I.N.D.) and also
Construction Contracts - Law and Management
(by Hughes W., Champion R. and Murdoch J.).
14
Billows J., Kroll K., Pikul P . et al. (August 2018).
Capital Project value improvement in the 21st century: Trillions of dollars in the offing
.
www.mckinsey.com/industries/capital-Projects-and-infrastructure/our-insights/capital-Project-value-improvement-in-the-21st-century-trillions-of-dollars-in-the-offing
(accessed 05 September 2018).
15
MBA Knowledge Base (5 March 2012).
Build Operate Transfer (BOT) Model
.
www.mbaknol.com/Project-management/build-operate-transfer-bot-model
(accessed 31 July 2018).
16
Hyari K. and Kandil A (2009).
Validity of Feasibility Studies for Infrastructure Construction Projects
.
Jordan Journal of Civil Engineering
, 3(1).
Chapter 2Construction Project Implementation Routes
2.1 Different Approaches
I freely acknowledge that there are many different ways to approach the implementation of construction Projects that will result in getting a proposed facility constructed (successfully or otherwise). However, since the focus of this book is on EPC and Design-Build Projects, I only intend to contrast those two procurement routes with what is known as the Traditional Contracting route. Also, in order to clear up any confusion that may exist in the reader's mind about the relationship between EPC Projects and the construction procurement route known as EPCM (Engineering, Procurement and Construction Management), within Section 2.52.5 (EPCM Approach) I also briefly touch on that particular implementation method.
2.2 Traditional Contracting Approach
2.2.1 Design Team's Appointment and Role
Having established that a Project is feasible in all respects (see Section 1.4 – Common Elements for Construction Projects), the traditional way to implement a construction Project is for the Employer to appoint a Design Team. Usually that will be either a lead architectural entity or, if more appropriate for the type of Project involved (such as, for example, a new viaduct, a sewage treatment plant or a processing facility), an engineering design entity. The role of that Design Team would be to handle the following primary tasks.
Undertaking the design work for the entire facility (except, perhaps, for the final working/shop drawings that need to be prepared by specialists for bespoke manufacturing or complicated fabrication and installation work). This will generally also include taking the responsibility for supervising any separate specialist engineering work (such as that done by a geotechnical survey team and structural, mechanical and electrical engineers, etc.).
Advising on and preparing the specifications to determine the precise quality requirements for the finished facility.
Advising on the most appropriate bidding strategy for selection of the Contractor and any specialist Subcontractors.
Working with and monitoring the work of the team preparing the bidding documents for the various work packages, including the quantity surveying team preparing the bills of quantities (if applicable).
[Note: EPC Projects will not generally have bills of quantities, due to there being no detailed design available.]
Organising the entire bidding process for the construction work (including the separate bid packages for any specialist Subcontractors).
Advising on the bids received for the construction work and specialist subcontracted work.
Arranging for signing of the construction contract and subcontracted work packages by the Employer.
Administering the entire construction process, including:
supervising the construction work right through to completion of the commissioning activities and handover of the completed facility from the Contractor to the Employer;
monitoring the Contractor's and Subcontractors' work quality and progress;
issuing instructions in respect of any changes needed; and
closing out the construction contract and the subcontracts (including advising, in conjunction with the cost engineering team and/or quantity surveying team, on the settlement of all commercial matters and any claims with the Contractor and Subcontractors).
2.2.2 Employer's Participation
Beyond appointing the Design Team, under the Traditional Contracting approach the Employer's participation usually also encompasses the following.
Approving the issuance of bidding documents, in which the Employer either takes on 100% of certain risks or shares those risks with the Contractor.
Allocating risk sharing – an example of where the Employer would usually accept the entirety of a risk is in respect of the subsoil proving to be of poor quality, leading to higher costs for the foundations. An example of a risk typically shared would be in regard to the occurrence of exceptionally bad weather, where the Contractor would be entitled to extra time for completing the work but for which no monetary compensation would be payable to the Contractor. However, the Contractor would be relieved of the responsibility for paying Liquidated Damages for delayed completion due to this occurrence.
Arranging separately for certain key materials, goods and/or equipment to be supplied and/or installed by entities other than the Contractor.
Reviewing commercial bids received from construction companies for building what the Design Team's drawings and specifications show, where the Contractor's price is often based on the bills of quantities that are provided by the Employer's Team.
Awarding the Project implementation work to the bidder considered to be offering the best deal to the Employer (usually the lowest price, provided that the time-frame for completion is acceptable to the Employer).
2.2.3 Contractor's Role and Responsibilities
The Contractor's role and responsibilities under the Traditional Contracting approach are as follows.
Preparing and submitting a commercial bid for the Project, based on the drawings and specifications prepared by the Design Team. That will most likely be against bills of quantities provided by the Employer's Team, which the Contractor can assume accurately reflect what is needed to be provided in respect of the physical work for the completed facility.
After award of the construction contract for the Project:
ordering the required materials, goods, and equipment in line with the specification requirements,
providing and supervising all labour and construction equipment necessary for constructing, testing, and commissioning the completed facility, and
handing the completed facility over to the Employer for occupation/use.
Rectifying, at no cost to the Employer, any defects found in the completed facility during the warranty period following handover (often referred to as the ‘defects liability period’).
2.2.4 Traditional Approach Advantages
It should be noted that the prime advantage of employing the Traditional Contracting approach is that it provides much more confidence about the Project being handed over by the designated completion date than with almost any other approach to construction work, provided always that a competent Contractor has been selected. This is because there is far less likely to be uncertainty about the work content, since the Detailed Design drawings will have been finalised, thereby allowing fully detailed bills of quantities to be produced. That combined level of information enables the Contractor to determine the labour and construction equipment resources very accurately, right from the time of preparing the commercial bid. The foregoing reference to the completion date is in regard only to the construction activities. It is not to say that the overall time-frame for Project completion will be quicker than with the EPC route. This is because, under the Traditional route, the Detailed Design work has to be completed before the Contractor can commence the construction activities. That is not the same case with the EPC approach.
Having a Detailed Design completed ahead of the commercial bidding phase should also ensure that delays and additional costs due to unexpected design changes in the implementation phase are very much reduced. This may well be the reason why the Traditional Contracting approach to implementing construction Projects today still has greater prevalence than any other construction Project implementation method. This can be seen by researching on the Internet to see how various governments around the world handle the implementation of construction Projects, typical of which is the South Australian government's preferred contracting strategy.1
2.2.5 Traditional Approach Disadvantages
Under the Traditional Contracting approach, the Employer often chooses to get involved in the direct appointment of companies to undertake key elements of the Project, such as, but certainly not limited to, curtain walling, elevators, and specialist installations (e.g. air conditioning). This means that there can be many different companies involved directly with the Employer, each requiring a separate set of contract documents to be signed with the Employer. This situation can lead to difficulties for Employers when it comes to allocating responsibility and liability to the right party for anything that goes wrong in the implementation stage or, subsequently, with the completed facility. Added to this, the Employer usually shoulders the greatest financial burden for Project delays if one of the contracting parties delays any of the other contracting parties.
