EPC Analysis

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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 Strategy

Contract Performance Risks

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”

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P re s e n te d a t t h e W o rld E n g in e e rin a n d 5 th M a y 2 0 0 9 b y D r. H im a d ri B a n e rji C M D B A S m S

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

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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

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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

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5 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 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 type of

contract that it enters into with an owner.

The contract strategy represents the way in which the

delivery

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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

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7 EPC Contract Fundamentals: Contracting Strategy

Contract Performance Risks

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.

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

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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,

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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

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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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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

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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

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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

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P re s e n te d a t t h e W o rld E n g in e e rin g C o n g re a n d 5 th M a y 2 0 0 9 b y D r. H im a d ri B a n e rji C M D B A S m S P v t. L td .

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,

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19 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

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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

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21 Managing Risks

As an integral part of sound project

management practices,

Risk management is a systematic and

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Case Study in Risk Management: EPC Contract

Risk Assessment and Mitigation During Economic

Meltdown.

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25 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

3.EPC Projects Data : Value at Risk

Projects Affected

Research Findings

4.World’s Largest EPC Contractors

Backlog and Impact on Global Forward Manufacturing

5. Thank You

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29 Economic Downturn and Macro Impacts on

Exchange Rates and Capital Inflows

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Economic Downturn and Macro Impacts

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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

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Economic Downturn and Macro Impacts:

Oil Price Volatility and

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41 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

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 PROJECTS

RECOVERY FROM THE DOWNTURN

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MANAGING EPC RISKS IN MEGA EPC PROJECTS

RECOVERY FROM THE DOWNTURN

EPC 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)

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43 MANAGING EPC RISKS IN MEGA EPC PROJECTS

RECOVERY FROM THE DOWNTURN

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 that’s a clear barometer that

equipment will be ordered going forward and

are signals for the manufacturers to start

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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)

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45 Projects Today

1. Trans Sahara Pipeline

2. Al-Shaheen Refinery

3. Nabucco Pipeline

4. Yanbu Export Refinery

5. Khalifa Point & Fujairah

Refineries

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

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Thank You