Practical Risk Management for EPC / Design-Build Projects. Walter A. Salmon
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risks materialising.
A large proportion of the publications I have read about how Contractors should implement sound risk management dealt predominantly with corporate risks, with the subject matter treated in a very generalised fashion. Most writers had not divided the subject up into digestible chunks or split the responsibilities clearly between the different Departments accountable for the required task inputs. Nearly all such publications also tended to concentrate on the various theoretical approaches available for assessing the overall risks of taking on a new Project. Very little had been written as to what the typical risks are in respect of the specific workloads of each individual Department, or how the complement of various Managers should best work together to handle those risks during Project implementation. As a result, I considered those publications were generally not specific enough to be truly useful for a Contractor's Corporate Managers, Project Managers and Department Managers. This book was therefore written in an attempt to fill the gaps and resolve the shortcomings I had observed.
It will be seen that there is a distinct lack of academic and theoretical content in this book, which was another deliberate decision I made. This was because my intent was to present a document that contained predominantly practical content that could be applied with immediate effect in the workplace on a daily basis. It is not that I object to applying academic principles to Project Risk Management – far from it. It is just that the aim of this book is to focus on practical matters. Anybody wishing to research the various theoretical approaches that can be applied to Project Risk Management can do so by following the references I have supplied within this book (and which I believe would help them to undertake further worthwhile detailed research of their own).4
I do not pretend that the advice in my book is intended to be a balanced document equally reflecting the interests of both parties to an EPC or Design-Build Contract (i.e. both the Employer and the Contractor). On the contrary, I have written primarily for the benefit of Contractors. I have therefore deliberately avoided mentioning situations where the Employer could take advantage of the Contractor. Having said that, nowhere do I make any suggestions that amount to the Contractor ripping off the Employer; but putting the Contractor into a legitimately stronger position, most certainly ‘yes’. The purpose of my book is simply to show where managing the risks better will prevent unnecessary losses for the Contractor. Of course, nothing prevents a member of the Employer's Team from reading this book, learning where the Contractor is most likely not to be managing risks properly, and then using that knowledge to defeat the Contractor's claim for extra time and/or money. The way for Contractors to overcome that problem is for them to sharpen up their Project Risk Management capabilities.
I included the term ‘Design-Build’ in the title of this book, since I consider that there are only subtle differences between how EPC Projects and Design-Build Projects are set up and run. The reality is that the risks I cover in this book can apply equally to both types of Project since, under each of the different arrangements, the responsibility for the design work (as well as the procurement and construction work typical to all construction Projects) falls to the Contractor. I have therefore opted in later chapters not to repeat the term ‘Design-Build’ unless I felt it was particularly necessary to do so.
In an effort to deal with most of the major problems that could be encountered, I have taken into consideration the worst-case contractual scenario I can think of in respect of the risks that a Contractor could possibly face in undertaking an EPC Project. That is where the Contractor is required to submit a lump-sum bid for an overseas Project in a developing country for a specialised process plant (such as an oil refinery), in the situation where the Invitation to Bid documentation issued by the Employer comprises only:
1 an incomplete Conceptual Design;
2 an outline Functional Specification that requires finalisation during the bid negotiation phase (i.e. no detailed specifications are provided);
3 a preliminary Plot Plan (i.e. not a fixed layout) that likewise needs to be firmed up in the bid negotiation period;
4 a mixed complement of loosely coordinated technical and administrative requirements that contain many references to third-party standards that sometimes conflict with each other; and
5 a set of contractual requirements that are heavily biased in the Employer's favour.
The foregoing list of inadequate documentation is a far cry from that which the International Federation of Consulting Engineers (more commonly referred to as ‘FIDIC’) envisages for EPC Projects (i.e. detailed, specific Employer's Requirements are expected as a norm).5 However, I have personally experienced working on and resolving the problems for Projects where one or more of the above inadequacies occurred (and one Project where they all occurred), although I am not at liberty to identify those Projects here. I am, however, certain that such unfairly and awkwardly constructed Projects will keep appearing, just as long as there are Contractors around who are desperate for whatever work they can get their hands on in the location they wish to build their future in.
I have had a number of people who have read some of my observations of where things went wrong on construction projects say words to the effect of ‘it's just bad management’, as if telling people to employ ‘good management’ would have miraculously cured the problems I encountered. My stance is that the many people I observed suffering the negative effects of their own poor management were usually completely unaware of what they had done wrong (or had failed to do correctly). Knowing that you have to employ good management is very different from knowing what good management is. The purpose of this book is therefore to divulge what I myself have seen go wrong, and to offer my advice as to how such situations could have been handled better. My hope is that this will lead to sound Project Risk Management being put into practice more often.
1.2 The Book's Content and Structure
I wish to stress that the core content of this book is to be found in Chapter 6 (Project Roles, Functions and Responsibilities), which sets out, over the course of 26 sections, what I consider the Contractor's key management personnel must do (or avoid doing) in order to ensure the success of a Project. However, before launching into the detailed nitty-gritty of Project Risk Management for EPC Projects at a practical level, I feel that there are a number of important matters that need to be aired and/or straightened out first. This is largely because I have received a lot of negative comments over the years from people in the construction industry about the EPC/Design-Build concept of Project implementation. Very often, such comments came from those who had little or no experience of what is involved, so their negative comments were perhaps not surprising.
The principal negative comments against the EPC approach I received were as follows:
1 Too many Contractors working on EPC Projects have failed miserably to achieve the time and cost objectives. As McKinsey & Company found in 2017, Project durations have often been horribly extended and the final costs have quite regularly far exceeded the original budgets.6(This does not appear to be as big an issue for Design-Build Projects, perhaps because their application is often to much smaller undertakings (private residences being an example). Such Projects are also often carried out by highly specialised teams with tried-and-tested technology [for example, cold storage building contractors, swimming pool installers and prefabricated building suppliers]. In such cases, the risk sharing between the Contractor and the Employer seems to be much more evenly balanced than on EPC Projects [especially when compared to the fixed-price, major turnkey ones], as was observed by Banik and Hannan.7 )
2 The Contractor is responsible for and has complete control over at least the detailed design work, and may therefore be tempted to skimp on the quality of the finished facility wherever it