Practical Risk Management for EPC / Design-Build Projects

WALTER ALFRED SALMON is a Chartered Quantity Surveyor and was, until very recently, Contracts Advisor to the general manager of an international contracting organization that specializes in carrying out EPC Projects for the Oil & Gas Industry in the Middle East.

Foreword xiii

Preface xv

Acknowledgements xix

1 Introduction 1

1.1 The Book’s Focus and Objectives 1

1.2 The Book’s Content and Structure 4

1.3 Generality of Contractual Advice Given 7

1.4 Common Elements for Construction Projects 8

2 Construction Project Implementation Routes 11

2.1 Different Approaches 11

2.2 Traditional Contracting Approach 11

2.2.1 Design Team’s Appointment and Role 11

2.2.2 Employer’s Participation 12

2.2.3 Contractor’s Role and Responsibilities 13

2.2.4 Traditional Approach Advantages 13

2.2.5 Traditional Approach Disadvantages 14

2.3 Design-Build Approach 14

2.4 EPC Approach 16

2.4.1 EPC Project Suitability 16

2.4.2 Contractor’s Obligations 17

2.4.3 Employer’s Participation 17

2.4.4 Standard EPC Contracts Available 18

2.4.5 General Notes of Interest 20

2.5 EPCM Approach 21

2.6 Employers Prefer Lump-Sum Contracts 23

2.7 Fixed-Price Lump-Sum Contracts 25

2.8 Selecting the EPC Contractor 26

3 EPC Project Risk Management Overview 29

3.1 Project Risk Management – Definition 29

3.2 Construction Project Hazards Abound 29

3.3 Importance of Project Risk Management 31

3.4 Corporate Risks Versus Project Risks 32

3.5 Greater Risks for EPC Contractors 33

3.6 Principal Disaster Areas on EPC Projects 34

3.7 Maintaining the Project Schedule 36

3.8 Departmental Interface Issues 36

3.8.1 Rework 37

3.8.2 Delayed Technical Bid Evaluations 38

3.8.3 Late Mobilisation of Procurement Team 38

3.8.4 Red-Line Drawings Left Too Late 39

3.9 Forging an Integrated Implementation Team 39

3.10 Allocating Responsibility for Handling Risks 40

4 EPC Project Pre-Implementation Problems 43

4.1 Bidding Process Pitfalls 43

4.2 Failure to Embrace Lessons Learnt 44

4.3 Failure to Understand Contract Terms 45

4.4 Qualifications, Deviations and Exceptions List 46

4.5 False Management Resourcing Plan 47

4.6 Underestimating the Costs 48

4.7 Conceptual Design Bid Pricing Problems 50

4.8 Agreeing to Inadequate Completion Time 50

4.9 Reliance on Employer’s Information/Data 54

4.10 Late Approval of CDVR 54

4.11 Gateway Between FEED and Detailed Design 55

4.12 Extended Review Period for Deliverables 55

4.13 Objecting to Impractical Review Process 56

4.14 Underestimating Equipment Procurement Packages 58

4.15 Rejection of Country of Origin 59

4.16 Responsibility for Governmental Problems 60

4.17 Performance Bond Early Submission 60

4.18 Requirement for On-Demand Bonds 61

4.19 Import Duty Responsibilities 62

4.20 Local Content Obligations Downplayed 63

4.21 Contractor’s Bid Modifications Ignored 64

4.22 Relying on Carrots 65

4.23 Square Pegs and Round Holes 66

4.24 Failure to Check the Margin 68

5 Overseas EPC Project Preparatory Work 71

5.1 Critical Path Identification 71

5.2 Setting Up Contractor’s Administrative Systems 73

5.3 Determining Appropriate Management Structure 73

6 Project Roles, Functions and Responsibilities 75

6.1 The Project Management Consultant 75

6.1.1 Primary Functions 75

6.1.2 PMC’s Duty and Loyalty is to Employer 76

6.1.3 PMC’s Different Take on Time 77

6.1.4 Employer’s Direct Personnel in Lieu of PMC 78

6.2 The Board of Directors 79

6.2.1 Primary Functions 79

6.2.2 Ethical Compliance Responsibilities 79

6.2.3 Shop Floor Compliance Problems 81

6.2.4 Corporate Directives for Limiting Compliance Transgressions 82

6.2.5 Speeding Up Financial Decision-Making 83

6.2.6 Ensuring Veracity of Reporting 84

6.3 The Project Director 86

6.3.1 Standing of Project Director 86

6.3.2 PD’s Functions and Responsibilities 86

6.3.3 Good Communication and Quality Reporting 87

6.3.4 Importance of a Good PD 89

6.4 The Project Manager 90

6.4.1 Primary Functions 90

6.4.2 PM’s Reporting Duties 93

6.4.3 Preparation of Project Execution Plan 95

6.4.4 PM’s Responsibility for Risk Management 96

6.4.5 PM’s Key Considerations for Minimising Risks 97

6.4.5.1 Identifying and Managing the Project’s Major Risks 97

6.4.5.2 Helping to Develop the Project Execution Plan 98

6.4.5.3 Organising, Monitoring and Controlling the Project’s Resources 98

6.4.5.4 Ensuring Safe Working at All Times 99

6.4.5.5 Directing and Monitoring the Project’s Management Staff 100

6.4.5.6 Monitoring and Reporting on the Project’s Actual Progress 101

6.4.5.7 Developing/Implementing Appropriate Plans to Redress Delays 104

6.4.5.8 Completing within the Agreed Time-Frame 105

6.4.5.9 Delivering the Expected Quality of Finished Product 107

6.4.5.10 Completing within the Approved Budget 108

6.4.6 PM’s Preferred Communication Style 110

6.5 The Project Controls Manager 110

6.5.1 Range of Functions May Vary 110

6.5.2 PCM’s Primary Functions in the Wider Role 111

6.5.3 Importance of the PCM’s Reporting 112

6.5.4 Overloading the PCM’s Responsibilities 113

6.6 The Project Controls Department 113

6.6.1 The Department’s Objectives 113

6.6.2 Planning and Controls Explained 115

6.6.3 PCD’s Planning and Controls in Practice 116

6.7 The Planning/Scheduling Team 117

6.7.1 Unrealistically Short Project Schedules 117

6.7.2 Importance of a Sound Project Schedule 118

6.7.3 The Project Schedule’s Owner 119

6.7.4 Managers Must Embrace the Project Schedule 120

6.7.5 Compiling the Work Breakdown Structure 121

6.7.6 Determining the Planning Strategy 121

6.7.7 Finalising the Baseline Project Schedule 122

6.7.8 Schedules Beyond the Project Schedule 122

6.7.9 Major Risks for the Planning Manager 123

6.7.10 Retrospective Compilation of Project Schedule 125

6.8 The Engineering Manager 125

6.8.1 Primary Responsibilities 125

6.8.2 The Engineering Department’s Customers 127

6.8.3 Key Preparatory Activities for Engineering Work 127

6.8.4 Primary Risks for Engineering Work Activities 130

6.8.4.1 Late Delivery of Engineering Documentation 130

6.8.4.2 Gradual Scope Creep 131

6.8.4.3 Inadequate Monitoring of Engineering Subcontractors 131

6.8.4.4 Disruption of Information Management Tasks 132

6.8.4.5 Failure to Rationalise the Information Management System 132

6.8.4.6 Reliance on Document-focused Progress Reporting 133

6.8.4.7 Problems Caused by Employer’s Non-readiness 134

6.9 The Procurement Manager 135

6.9.1 Primary Responsibilities 135

6.9.2 The Procurement Department’s Prime Customer 136

6.9.3 Deciding Equipment/Deliverables Delivery Dates 136

6.9.4 Considerations for Long-Lead Items 137

6.9.5 Late Engineering Deliverables 138

6.9.6 Risk of Corruption Occurring 138

6.9.7 Tracking Manufacturing and Delivery Status 139

6.9.8 Effective Use of Expediters 140

6.9.9 Avoiding Delays from Employer’s Side 140

6.9.10 Due Diligence on Vendors and Subcontractors 142

6.9.11 In-Country Services Problems 142

6.9.12 Customs Clearance Problems 143

6.9.13 Reducing the Risks of Non-Performing Service Providers 143

6.9.14 Obtaining All Available Discounts 144

6.9.15 Arranging On-Site Support Services 144

6.9.16 Ordering More Spares than Necessary 145

6.10 The Expediting/Logistics Manager 145

6.10.1 Primary Responsibilities 145

6.10.2 The Expediter’s Role 146

6.10.3 Where Vendors Can Fail 146

6.10.4 Spare Parts Documentation 146

6.10.5 The Logistics Support Activities 147

6.11 The Construction Manager 147

6.11.1 Principal Function and Responsibilities 147

6.11.2 Working Quickly, Effectively and Safely 149

6.11.3 Poor Quality Work Delays Pre-Commissioning 149

6.11.4 Implementation Pitfalls 150

6.11.4.1 Not Following the Project Schedule 150

6.11.4.2 Not Holding Regular Formal Meetings 150

6.11.4.3 Not Preparing for Mobilisation Adequately 150

6.11.4.4 Not Making Surprise Work Area Visits 151

6.11.4.5 Not Holding Job Performers Accountable 152

6.11.4.6 Not Documenting Changes Adequately 152

6.11.4.7 Not Limiting Authority for Managing Resources 152

6.11.4.8 Not Assessing Productivity Properly 153

6.11.4.9 Not Progressing Completion Certification Adequately 153

6.11.5 Subcontracting Risks 156

6.11.6 Permit to Work Compliance 158

6.11.7 Delay Risks Caused by Suppliers 158

6.11.8 Controlling Wastage 158

6.12 The Commissioning Manager 160

6.12.1 Primary Responsibilities 160

6.12.2 Major Risks 161

6.12.2.1 Spare Parts Availability 161

6.12.2.2 Commissioning Safely 161

6.12.2.3 Commissioning Equipment Jointly with the Employer’s Team 162

6.12.3 Emergency Vehicles Requirements 162

6.13 The Operational Readiness Manager 162

6.13.1 Primary Function 162

6.13.2 Reliance on the Information Management Team 163

6.13.3 Inputs from the Operational Readiness Manager 163

6.13.4 Lack of Operational Readiness Information from Others 164

6.13.5 Operational Readiness Documentation Focus 164

6.13.6 Employer Pressure to Improve Facilities 164

6.14 The QA/QC Manager 165

6.14.1 Quality Assurance Versus Quality Control 165

6.14.2 QA/QC Manager’s Primary Responsibilities 165

6.14.3 Main Risks for QA/QC Manager 166

6.14.4 Avoiding Quality Assurance Risks 166

6.14.5 Reducing Quality Control Risks on the Site 166

6.14.6 Reducing Vendor Quality Control Risks 167

6.15 The HSE Manager 167

6.15.1 Importance of HSE Inputs from Everybody 167

6.15.2 Primary Responsibilities 168

6.15.3 Safety Provisions and Training 168

6.15.4 Enforcing HSE Rules to Prevent Accidents 169

6.15.5 Motivating On-Site HSE Officers 170

6.15.6 Off-Site HSE Incidents 170

6.15.7 Safety Moment Chats 171

6.16 The Camp Boss 171

6.16.1 Primary Responsibilities 171

6.16.2 Major Risks 172

6.17 The Project Information Manager 173

6.17.1 Importance of Information Management 173

6.17.2 Information Overview 173

6.17.3 Electronic Document Management Systems 174

6.17.4 PIM Role and Primary Responsibilities 176

6.17.5 Major Risks for the PIM 177

6.17.6 Dedicated Data Inputters 177

6.17.7 Information Management Support Personnel 178

6.18 The Document Control Manager 179

6.18.1 Standardised Document Management System 179

6.18.2 Controlling Communications 180

6.18.3 Vetting Documents Before Issuing 180

6.18.4 Restricting Email Usage 181

6.18.5 Benefits of a Standard Documents Library 181

6.19 The Information Technology Manager 182

6.19.1 IT System Security 182

6.19.2 Backing Up Work from Personal Computers 182

6.19.3 Ensuring Integrity of Computerised Data 182

6.19.4 Reducing Contractor’s Software Costs 183

6.20 The Interface Manager 184

6.20.1 Primary Function and Responsibilities 184

6.20.2 Interface Management Plan 184

6.20.3 External and Internal Interfaces Explained 185

6.20.4 Identifying/Locating Interfaces 186

6.20.5 Interface Slip-Ups 187

6.20.6 Closing Interface Activities is Hard Work 188

6.21 The Contract Administration Team 189

6.21.1 Determining the Compilation of the Team 189

6.21.2 The Project Contract Manager 190

6.21.3 The Contract Administration Manager 190

6.21.4 The Subcontracts Manager 191

6.21.5 Compiling the Contract Summary 192

6.21.6 Identifying Risk Exposure 192

6.21.7 Importance of Keeping Records 193

6.21.8 Risk of Collusion in Measurement/Costing Team 195

6.21.9 Facilitation Role of the Contract Administration Team 195

6.21.10 Illusory Claims 196

6.22 The Human Resources Manager 196

6.22.1 Primary Responsibilities 196

6.22.2 Becoming the Employer of Choice 197

6.22.3 Recruitment Issues 198

6.22.4 Emergency Replacement for Key Personnel 199

6.23 The Administration Department 200

6.23.1 Primary Responsibilities 200

6.23.2 Providing Back-Up Support to Site Quickly 200

6.24 The Financial Management Team 201

6.24.1 Primary Responsibilities of Finance Manager 201

6.24.2 The Budget Controller 202

6.24.3 Controlling Purchases 203

6.24.4 Keeping Track of Expenditure 204

6.25 The Compliance Team 204

6.26 The Legal Department 206

6.26.1 Utilising External Legal Team 206

6.26.2 Utilising Dispute Adjudication Boards 207

7 Reducing Joint-Venture/Consortium Risks 209

7.1 Joint Venture Versus Consortium 209

7.2 JV Considerations 209

7.3 Setting Up a JV Steering Committee 210

7.4 Objectives of JV Steering Committee 211

7.5 JV Members are Partners 212

8 Claims Management Risks and Problems 215

8.1 Relying on Claims to Achieve Profitability 215

8.2 Factors Legislating Against a Claim’s Success 216

8.3 Key Ingredients for Worthwhile Claims 217

8.4 Proving Excusable Delay 217

8.5 Key Components of Successful Claims 218

9 Identifying Hazards and Managing the Risks 219

9.1 Introduction 219

9.2 Potential Hazards for Construction Projects 220

9.3 Responsibility for Project Risk Assessment 222

9.4 Identifying and Managing Project Risks 224

9.5 Project Main Risks Register 227

9.6 Risk Assessment Team Inputs 228

9.7 Relative Risk Factor Assessment 229

9.8 Risks Arising from Safety Studies 230

9.9 Dealing with Safety Risks to On-Site Personnel 232

9.10 Dealing with Health Matters for On-Site Personnel 236

9.11 Dealing with Risks to the Environment 237

List of Figures:

Figure 6.1 Interfaces for EPC Project’s Departments and Teams 114

Attachments:

Attachment A Matrix of Project Risk Areas and Corresponding Risk Management Solutions 239

Attachment B Matrix of Prime Risk Considerations, Impacts & Consequences 243

Attachment C Example Project Main Risks Register 245

Attachment E Task Hazard Assessment Worksheet 251

Appendices:

Appendix A Abbreviations and Acronyms 253

Appendix B Glossary 255

Appendix C EPC Project Management Team Organisation Structure 269

Appendix D EPC Project Departmental Organisation Structure 271

About the Author 275

Index 277