Perspectives on Managing Risk on Large-Scale EPC Projects
Andrew Rhodes, President of The Rhodes Group is proud to join Bart Turner of KBR, Stuart Shaw of Black & Veatch and Brian Davidson of DFL Legal to speak on a panel at this year’s Construction SuperConference. This diverse group will discuss the identification and management of risk with a focus on the entire life cycle of large-scale EPC projects. We asked the panelists to discuss their perspectives and experiences on megaprojects and wanted to share the insights of these industry leaders.
Can you describe some of the typical processes for evaluating and managing schedule and cost risk?
Managing cost and schedule risk is an iterative process throughout all phases of a project. For example, a baseline schedule on a large EPC project should start with defined milestone dates that have hard quotes by vendors and subcontractors. This can serve as the basis for a Quantitative Schedule Risk Assessment to determine probability of success in meeting the key milestone dates. This initial assessment can be used to help manage risk and guide the related negotiations during the contracting phase. The project execution phase should include similar iterative schedule assessments to monitor risks presented by changes in the schedule. The ongoing risk assessments can be used to identify key areas of risk and develop plans for managing the identified risks.
Similarly, with respect to cost risk, an initial assessment should include operations cost estimates based on hard vendor and subcontractor quotes. This assessment may also include additional costs in the project based on a contingency analysis and funded-liabilities exercise. The project execution phase should include iterative assessment exercises such as periodic check estimates that take into consideration the baseline estimate and changes encountered during project execution. The results of these assessments can be used to develop plans for managing the identified risks through project execution strategies or draw downs on contingencies and funding.
Why do you think that it is important to take time to participate and present at the SuperConference?
The CSC is well attended by owners, contractors, experts and lawyers. It allows us to share ideas and experiences that we have faced on projects throughout the years and hopefully learn from them on future projects. We also learn about trends in the market with respect to risk sharing in contracts. The CSC also allows us the time to meet with colleagues and friends as we share a few laughs and war stories.
Do you think that the greatest risks to success of large-scale EPC projects are internal or external to your company?
As we lawyers are prone to say, “It depends.”
Over the 12 plus years that I have been with Black & Veatch, we have addressed EPC project challenges that are the product of our own performance and others that have arisen from external circumstances. An example of the latter is the unpredictable escalation in supply chain costs and skilled labor shortages that impacted many projects in the wake of Hurricanes Katrina and Rita in 2005. Our pricing and escalation models did not and could not have predicted such profound impacts, and during that period of time, for fixed-price projects in the early stages, the burden on the EPC contractor was heavy. While external events routinely impact the performance of our EPC projects, such profound impacts are much more the exception than the rule.
Experiences such as these emphasize the need for constant reflection on how we identify risk; how we manage risk at the proposal stage with balanced contract terms, schedule and pricing; and how that risk is then managed and monitored during the execution of the project. For most of our EPC projects, it is our internal controls and project execution that factor most significantly into our success.
The various phases of an EPC project are typically staffed by different groups of personnel. How does your organization promote or support the transfer of information, experience and lessons learned from one phase or project to another?
Many of our major EPC projects are driven by a Project Manager who is engaged with the project in the proposal stage and carries on through project execution and project closeout. As a fair number of these projects (in particular large power projects) can extend for three years or more, the Project Manager will be surrounded by a team of key individuals who may serve multiple roles over the course of the project but who collectively maintain the critical institutional knowledge that drives project success, especially as the job progresses and those professionals transition to other projects and responsibilities.
It’s also critical that project documentation and financial reporting is maintained in a consistent and predictable manner, and the company has continued to evolve and improve our systems over time.
Why do you find risk management for EPC contractors important to discuss as part of the SuperConference?
We continue to observe instances during all phases of EPC projects when risks, particularly those that exposed the EPC contractor to additional time and costs, are not sufficiently assessed or managed. The repeated observation of such instances suggests there is more that can be learned regarding the assessment and management of risk during all phases of a typical EPC project. Thus, I think risk is a topic worth re-addressing, and trust that the attendees will benefit from hearing the additional perspective of experts, outside counsel and in-house counsel who have experience assessing and managing risks in all phases of a typical EPC project.
How does your experience as a consultant relate to an EPC contractor’s management of risk throughout the project life cycle?
Our expertise in analyzing and substantiating delay and disruption-related claims during the project execution and closeout phases provides us with a unique perspective. This perspective includes the recognition of remarkable similarities in the pattern of events that result in delay and disruption-related claims as well as opportunities to more effectively manage the related risks that are repeatedly overlooked by contractors of all sizes and degrees of sophistication. The degree to which our perspective can help manage the additional risk resulting from delay and disruption events is often a function of when we are brought onto a project. For example, if our involvement is limited to supporting the resolution of disputes during project closeout, we can provide a comprehensive assessment, but our ability to help mitigate risk may be limited by the sufficiency and consistency of contemporaneous project records. If we are engaged during project execution, we can better assist in ensuring that project documentation is sufficient to substantiate technical or legal entitlements – or defenses. Our perspective, when integrated with project personnel and legal counsel early in the project, can have a much greater impact on risk assessment and mitigation; and thus, can benefit EPC contractors.
Which phase of an EPC project offers the most opportunity for mitigating schedule and cost risk?
While there are several actions that a party can take to mitigate schedule and cost risks during contract negotiation and project execution, one area that is often overlooked is the transition period between those two phases. And, that phase is often the one in which the most opportunity to mitigate schedule and costs risks is needed. At times, personnel who were involved in the bid phase and contract negotiation are not involved in the execution of the project, whether intentionally or by natural attrition. This can create a gap in the institutional knowledge of the project, which could create unforeseen risks. To mitigate this potential risk, some of the same personnel should be involved in both phases of the project. If different personnel are used, then the execution team should get involved as early as possible in the bid phase and the bid personnel should remain available to the project execution people for insight and information. Additionally, a party should create a written project execution manual that can be distributed to current and future personnel from the beginning that sets forth the project philosophy on items such as engineering, scheduling, procurement, project management, etc. This will increase the likelihood of a consistent, informed approach to project execution and help to reduce schedule and cost risks.
What do you see as the primary legal challenge(s) when risk is not sufficiently recognized or managed during the project execution stage?
Whenever previously unidentified or unmanaged risks surface during the project, one of the primary challenges is to balance completing the project with protecting your legal rights. Sometimes those interests may be at odds with each other and, depending on how they are handled, can lead to claims and disputes. Once surfaced, a best practice is to perform a rapid analysis of these competing factors that identifies the options now available to achieve a favorable project outcome.