Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

1

EPC CONTRACTS: RISKS IN MEGA EPC PROJECTS

Agenda for Presentation

EPC Contract Fundamentals:

Fixed Price Contract

Economic Benefits

EPC Contract Fundamental: Some Questions

Contracting StrategyContract Performance Risks

Graphs and Figures

Revenue Profile For a Typical EPC ContractExecution Risk As EPC Contract ProgressesExecution Risk As Cost Plus Contract ProgressesRelative Risk Reward Profiles of Different Contract Strategies

EPC Contract Execution Risks: Owner Contractor Interactions

Owner Demands and OversightsContractor PressuresDisputes: Causes and Possible ReasonsSummary Research Findings: Risk Management

Case Study in Risk Management: “EPC Contract Risk Assessment and Mitigation During Economic Meltdown”

1/7/2010

1

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

2

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.

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

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.

� 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 build/ EPC construction environment.

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

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 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.

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

5

EPC Contract Fundamentals: Contracting Strategy

Contracting Strategies

The design-build/EPC process merely establishes the roles and relationships among the key members of th e 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 typ e of contract that it enters into with an owner.

The contract strategy represents the way in which t he delivery

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

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 tho se functions,

-also accepts the risks of performing-those functions according to the standards -and conditions laid down in the contract

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

7

EPC Contract Fundamentals: Contracting Strategy Contract Performance Risks

Typically, in fixed-price contracting, any unforese en cost is not strictly underwritten within the original contr act and likely to be assumed by the contractor.

The fixed price that envelops the contract should accommodate a worst-case scenario if execution risk s become a reality.

This buffer is calculated in the form of a continge ncy and can represent up to 15% of the asking price.

The best case scenario is that these are not exerci sed, in which situation they are released and materialize as additional “cream” on top of the base price/margin.

In the worst-case scenario, these risks exceed the contingencies put in place and erode the base margi n to an extent that the contractor loses money on the proje ct

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

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,

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.

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

9

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, procurement, and construction and any resulting efficiencies in cost and schedule.

EPC Contract Fundamentals: Contracting Strategy Contract Performance Risks

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

10

Revenue Profile Rebased to 1 for a Typical EPC Cont ract

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

11

Typical Amplification of Execution Risk As EPC Cont ract Progresses

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

12

Typical Amplification of Execution Risk With Cost P lus Contract

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

13

Relative Risk Reward Profiles of Different Contract Strategies

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

14

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 guarantiesOwner supplied equipment

With no corresponding assumption of risk, and witho ut a proper change management process defined in the EPC Contract for such interventions.

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

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.

Contractors bid on EPC projects where they were

Unable to adequately utilize value engineering

Unable to Innovate to Balance

Forced to swallow increase in risk.

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

16

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 riskwith higher pricing, thereby depriving owners of thecost savings EPC projects were intended to provide.

Even worse, the incidence of disputes soared, oftenfollowed by protracted and costly litigation.

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

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

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

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

18

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.

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

19

EPC Contract Execution Owner Contractor Interactions: DisputesPossible 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.

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

20

� 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.

Summary of Research Findings

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

21

Managing Risks

As an integral part of sound projectmanagement practices, Risk management is a systematic andproactive approach to reduce uncertainties

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

22

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

23

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

24

Case Study in Risk Management: EPC Contract Risk Assessment and Mitigation During Economic Meltdown.

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

25

EPC Contract Risk Assessment and Mitigation During Economic Meltdown.

1..EPC Risk Dynamics Measures of Economic Downturn and Macro Impacts

Six Macro Economic FactorsGDPGlobal EquitiesExchange Rates, Capital Flows and Chinese YuanManufacturing and Industrial ProductionOil Price Volatility and E&P SpendingOil Price Volatility and E&P Cost Dynamics

2.EPC Risk Analysis and Mitigation :Risk AllocationInsurance and Hedging

3.EPC Projects Data : Value at RiskProjects AffectedResearch Findings

4.World’s Largest EPC ContractorsBacklog and Impact on Global Forward Manufacturing

5. Thank You

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

26

Economic Downturn and Macro Impacts: The Six Factor s

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

27

Economic Downturn and Macro Impacts on GDP Growth

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

28

Economic Downturn and Macro Impacts on Global Equit ies

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

29

Economic Downturn and Macro Impacts on Exchange Rates and Capital Inflows

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

30

Economic Downturn and Macro ImpactsChinese Yuan: Government Manipulated Exchange Rates

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

31

Economic Downturn and Macro Impacts on Manufacturin g

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

32

Economic Downturn and Macro Impacts on Industrial P roduction

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

33

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

E&P IHS/CERA Upstream Capital Costs Index

Dynamics Of Risks

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

34

Economic Downturn and Macro Impacts: Oil Price Volatility andExploration and Production Spending

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

35

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

36

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

37

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

38

Risk Analysis Mitigation Insurance

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

39

Risk Analysis Mitigation Risk Transfer Instruments

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

40

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

41

The Projects Affected During Transition

1.Ras Tanura Integrated Project (RTIP)2.Pearl GTL3.Petro Rabigh Refinery Upgrade4.Shah Sour Gas Field Development5.Khurais Oilfield6.Manifa Offshore Oilfield7.Saudi Kayan Petrochemicals Complex8.Hassyan Power & Desalination Plant9.Ras Girtas Power Project10.Shaybah Phase 2 Expansion

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

MANAGING EPC RISKS IN MEGA EPC PROJECTSRECOVERY FROM THE DOWNTURN

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

42

MANAGING EPC RISKS IN MEGA EPC PROJECTSRECOVERY FROM THE DOWNTURNEPC Companies Who Matter

1. Bechtel (USA)

2. Technip (France)

3. Aker Solutions (Norway)

4. Chiyoda Corporation (Japan)

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)

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

43

MANAGING EPC RISKS IN MEGA EPC PROJECTSRECOVERY FROM THE DOWNTURNEPC 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 that’s a clear barometer that equipment will be ordered going forward and are signals for the manufacturers to start forward Planning.

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

44

Projects Today

1. Nassiriya Oilfield (Iraq)

2. Integrated Gas Development Project(UAE)

3. South Pars Gas Field (Iran)

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)

9. Sipchem Polyvinyl Plants (Saudi Arabia)

10. Borouge (UAE)

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

45

Projects Today

1. Trans Sahara Pipeline

2. Al-Shaheen Refinery

3. Nabucco Pipeline

4. Yanbu Export Refinery

5. Khalifa Point & FujairahRefineries

6. Jubail Export Refinery

7. Integrated Gas Development

8. Abu Dhabi Crude Oil Pipeline

9. Kuwait Oil Co drilling platforms

10. Oman oilfield services contract

Presented at the W

orld Engineering C

ongress Bangkok 4th

and 5th May 2009 by

Dr. H

imadri B

anerji CM

D B

AS

mS

Pvt. Ltd.

46

�Thank You

46