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Kosovo Motorway, Kosovo
42°24’29”N |20°15’50”E
Managing Risk in Mega-EPC
Projects – Where Do We
Start?
CIVIL
GOVERNMENT SERVICES
MINING & METALS
OIL, GAS & CHEMICALS
POWER
Concept: Risk
What is Risk?
A “risk” is an uncertain event or condition that, if it occurs, has a
positive or negative effect on the business - at a project, GBU or
enterprise level.
Risks can be Threats or Opportunities
It’s the essence of business – must take risks to generate returns
Importance of Risk Management
Every business is surrounded by risks, many of which are
identifiable and manageable
Differentiate between risks taken after careful judgment and those
taken unwittingly
The risk management framework must be robust enough to cope
with unexpected risks
How much risk is appropriate?
Risk management is an art as well as a science
© Bechtel | 2
Risk Management Philosophy in a Nutshell
Identify and assess the risks of a proposed project comprehensively, rigorously and honestly.
Do not just focus on project execution risks – there are many other risks that need to be managed (third party risk, political risk, jurisdictional risks etc.)
Do not just focus on contractual risks.
Surface new or unusual risks early.
Manage the risks of each project:
• Allocate and limit the risks in the prime contract
• Insure the risks that can be insured.
• Flow down appropriate risks to subs and suppliers.
• Build risk mitigation into the project execution plan.
• Price the residual risk (in contingency and fee) to balance risk
and reward.
© Bechtel | 3
A Risk Management Process – Typical Model
© 2012 Bechtel | 4
Risk Analysis Process
Risk Management Process
A. Risk Identification
B. Risk Assessment/Evaluation
C. Risk Management Strategies
Avoid• Avoid the Threat
• Forego the Opportunity
Funded UnfundedBy Contract By Insurance
Assume•Informed Assumption of
Threat
•Keep the Opportunity
Reduce/Exploit•Through Execution,
Performance, processes,
planning
Transfer/Share
Decline Work
(Priced Reserved) (Run the Risk)
Administrative Process
D. Active co-ordinated monitoring of risk
and effectiveness of mitigation plans
E. Claims Management
F. Feedback: Learning
The Risk vs. Reward Relationship
Business is about taking risks:
• Intelligently and on an informed and evaluated basis
• Receiving adequate reward for the risks assumed (by contract
or otherwise)
• Developing a robust framework to cope with the unexpected
Bechtel’s principal ways of managing risks are:
• Through engineering
• Our execution – e.g. our processes and procedures around
procurement, construction and management
• Fair contract terms
• Insurance
© Bechtel | 6
Using core competencies will enhance rewards in risk taking.
Project and corporate overall success depends on effective
risk management.
Allocation and Alignment of risk
Allocation of risk by agreement
Alignment of risk and ability to control the occurrence
Alignment of risk and ability to mitigate the effects
© Bechtel | 7
WEF Top Global Risks : 2011 - 2013
© 2012 Bechtel | 8
Probability
2011 2012 2013
1st
Meteorological
Catastrophes
Severe income disparity Severe income disparity
2nd
Hydrological catastrophes Chronic fiscal imbalances Chronic fiscal imbalances
3rd
Corruption Rising greenhouse gas
emissions
Rising greenhouse gas
emissions
4th
Biodiversity loss Cyber attacks Water supply crises
5th
Climatological catastrophes Water supply crises Mismanagement of
population ageing
Impact
2011 2012 2013
1st
Fiscal crises Major systemic financial
failure
Major systemic financial
failure
2nd
Climatological catastrophes Water supply crises Water supply crises
3rd
Geopolitical conflict Food shortage crises Chronic fiscal imbalances
4th
Asset price collapse Chronic fiscal imbalances Diffusion of weapons of
mass destruction
5th
Extreme energy price
volatility
Extreme volatility in energy
and agriculture prices
Failure of climate change
adaption
Economic Environmental Geopolitical Societal Technological
Project vs Corporate Risk - Frequency and Impact
© Bechtel | 10
Cost Impact
Frequency
Losses
Catastrophic Losses
Severe Losses
Facility/ProjectBusiness
Line Enterprise
Management of Risk During the Project Life Cycle
© 2012 Bechtel | 11
Prospect
screening
Prospect approval
Submission of proposal
Identification
Partners
Subcontractors
Shaping the deal
Engineering and construction commenced
Contract signed
Other works/client changes
Financial management
The deal
Risk flow down
Risk transfer
PERM Risk analysis
Execution methods
ES&H
Construction completed/signoff
Insurance claims/financial
recovery/ wrap-up
Project close out
Warranties
Latent liabilities
Corporate Risk Management Strategies for Catastrophic Exposures
Contractual Allocation
Insurance
Corporate Architecture?
© Bechtel | 12
Project Insurances
© Bechtel | 13
Liability – CGL/TPL
Builders Risk (CAR)
Worker’s compensation
Employer’s liability
Construction equipment
Professional liability/indemnity
Contractors pollution liability
Marine cargo
Aircraft liability
Marine liability
Railroad protective
Etc..
OCIPs and CCIPs (Wrap Ups)
© Bechtel | 14
Different terms, different meanings
Typical structure vs wrap up
Does it matter which party
arranges?
What are the drivers for the wrap
up?
Loss funds
Contract issues – wrap up manuals