Practical Risk Management for EPC / Design-Build Projects. Walter A. Salmon
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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 1 Introduction
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:
1 what I have found to be the major loss-making risks for lump-sum EPC/Design-Build Projects;
2 whose responsibility I consider it is for preventing those risks from materialising into problems; and
3 the best mitigation methods I suggest should