Session39 40

PROJECT MANAGEMENT & ECONOMICS
SESSIONS 39 & 40 Contracts Risk Management
A CONTRACT IS AN AGREEMENT BETWEEN TWO OR MORE PARTIES

DR ASSEM AL-HAJJ, Univation, RGU Project Management and Economics. SITP-SPDC, NIGERIA
Contracting
Contracts can range from covering a specific specialised project element to a total life cycle service to procure and operate a platform. Contract strategy should be designed to:
meet the projects objectives be more cost effective than any alternative strategy over the life cycle
TYPES OF CONTRACTS
Direct Project Managnt by Company staff
Project Services Contractor
Managing Contracts
EPIC Contracts
Alliance Contracts
Turnkey Contracts
(Fixed price)
Reimburs able Cost Contracts
Bills of quantities contracts
Guaranteed maximum price
Dayrate contracts
Schedule of rates
Time and Materials Contracts
Direct Project Management

by Company staff
Project Services Contracts
Managin g Contract s
Requires greatest amount of company involvement Company staff can be supplemented by thirdparty contract staff May be less effective in its response to changing circumstances
Supplies certain staff to the project management team
Responsible for administration of most major contracts under the direction of a small company team
EPIC Contracts
(Engineer, Design, Procure, Install and Commission) To execute the total scope of work within a project May include several phases, each with its own terms and conditions, but the contractor remains responsible for interface management A simplified type is EPC
(Engineer, Procure, Construct)
Alliance Contract s
Evolved from EPC/EPIC Contractors and client alike share the risk and reward in achieving objectives Contractors participation of risks already taken into account Both parties have the objective of beating the target through negotiation Both parties become share holders Cost savings based on negotiation between the parties When appropriate and successfully applied alliance contracts have recorded a 25% reduction in costs
Turnkey Contracts
(Fixed price)
A price quoted and accepted for work specified Defined starting and defined result Contractor has complete responsibility for managing and executing the work Little involvement by the company (client) Work specifications completely defined at the outset Contractor must be able to carry out the aspects of the project Reduces to a minimum the number of company staff required for the project Contractor is reviewed at regular intervals to assess work performance and quality Almost always involve significant additional costs
Reimbursable Cost Contracts

Simple reimbursable: contractor is reimbursed for costs and expenses but makes no profit. Usually takes place within the same company Cost-plus: simple reimbursement plus
some profit
Reimbursable plus management fee contractors profit is charged as a fixed fee
Reimbursable Cost Contracts
All direct and indirect expenditure incurred by contractor are paid. Based on actual costs Incentives included to provide profit Incentives are paid by instalments over life of project Requires elaborate cost reporting
Bills of quantities contracts These are lump sum contracts with detailed bills of quantities Usually approximate, with actual quantities measured on completion Final quantities agreed for contract price assessment
Guaranteed maximum price
Cost savings can be shared Contractor is limited in the extent to which excess costs
Dayrate contracts Contractor remuneration consists of a fixed rate per day for work performed Occur usually in the context of a drilling or construction project where contractor is to provide the main item of equipment e.g.:drilling rig construction laybarge
Schedule of rates Usually costplus contracts charged according to the number of work units performed. A specific unit charging rate will be agreed beforehand for each trade or work involved.
Time and Materials Contracts Apply when the major element of contractor remuneration consists of a fixed rate per unit for materials supplied by the contractor Usually civil construction
TRADITIONAL
EPC/EPIC
DPC
ALLIANCE
D D D
P P P
DPC
DPC DPC DPC
C C C
DPC Separate systems Integrated asset functionality
Separate activities & Systems
DPC= Design/Procurement/Construction
Tendered Contract
Negotiated Contract
Type
1. Lump Sum
2. Unit Rate
3. Reimbursable Cost
Scope
Fully defined
Equipment/Service defined (Usage uncertain)
Uncertain (not defined)
Applicability
Construction EPC Detailed design Total procurement
Conceptual design Construction Manpower Equipment hire Drilling Transport Maintenance Seismic acquisition& processing Dayrate/time rate Measure work Milestone Incentive
Conceptual design EPC Consultancy
Basis for remuneration
Fixed fee Milestone Incentive
Measured work Dayrate Actual cost Incentive Actual cost+profit
4 Turnkey 1,2,3 5 Bills of Quantities 1,2 6 Day rate 2,3 7 Time and materials 2,1 DR ASSEM AL-HAJJ, Univation, RGU 8 Alliance 1,2,3 Project Management and Economics. SITP-SPDC, NIGERIA
Combinations of types
Jacket Mod. Supp. Frame
Lump sum Lump sum

Lump sum Lump sum Day rates
Day rates
Topsides
Pipelines
Lump sum
Lump sum Lump sum
Schedule of rates
Schedule of rates
B.O.Q.
Day rates
Commission
Transport
Fabricate
Hook-up
Contractin g Strategies
Procure Design
Inspect
Install
All plans are forecasts
All forecasts are uncertain

All decisions are based on uncertain forecasts
RISK
Risk is when the actual deviates from the expected A measure of the probability and consequence of not achieving a defined project goal
(Kerzner)
An uncertain event or set of circumstances that should it occur, will have an effect on the achievement of the projects objectives
The Association of Project Management
UNCERTAINTY
Uncertainty is where the outcome of an event cannot be predicted via statistical probability and that the probability of their occurrence is unknown.
Risk is a measurable uncertainty, while uncertainty is an un-measurable risk

Sidney Newton
TYPES OF RISK
Physical/material:fire, corrosion, explosion, structural defect, war Consequential:loss of profits following fire, theft.. Social:changes in public opinion, expectations of work force, greater
awareness of moral issues (e.g. environmental issues)
Legal liabilities:statutory liabilities, contractual liabilities Political:government intervention, sanctions, inflationary/deflationary

policies, export/import restrictions, changes in legislation
Financial/Commercial:inadequate inflation forecasts, incorrect

marketing decisions
Technical: increased technology in manufacture, communications,

data handling, methods of storage, stock control and distribution.
Health & Environmental: accidents, pollution, reduction in

green field
Project environment as a hierarchy of sources of risk

GLOBAL
Risks of cost or time overrun Pre-completion:
ECONOMY
INDUSTRY
Post-completion risks:
financial risks design risks constructi on risks bidding risks operation and maintenan ce risks residual value risks
Political Legal Commercial Environmental Force majeure
FIRM
PROJECT
COST OF RISKS
Direct costs:
repair or replacement of damage, third party compensation
Measurable consequential costs of loss:

loss of or reduced output, knock on effect on production chain, losses whilst retraining replacement staff or becoming familiar with replacement equipment, accident investigation costs, lost management time involved in litigation, increased premiums
COSTS OF RISKS
Indirect costs of loss:

inability to meet contracts loss of market share loss of goodwill poor industrial relations poor workplace morale recruitment problems poor neighbourhood relations adverse press relationship
RISK MANAGEMENT
The process whereby responses to the risks are formulated, justified, planned, initiated, progressed, monitored, measured for success, reviewed, adjusted and (hopefully) closed.
Risk management means the identification, quantification and evaluation of risk. It demands a plan to manage risk, sometimes called a mitigation strategy.
Event Controllable?
Effect
Severity
Source Uncontrollable? Type
Risk Identification
Likelihood Measurement
Qualification
Risk Analysis
Quantification Probability
Avoidance
Risk Response
Reduction Transfer
Retention
RISK IDENTIFICATION
TECHNIQUES Check lists Prompt lists Brainstorming Delphi technique Probability-Impact Tables Interviews Risk Register
RISK ANALYSIS
TECHNIQUES
Application of probability theory Sensitivity testing (Spider diagrams) Monte Carlo simulation Decision trees
RISK RESPONSE
Risk insurance
against fire, accidents, theft..
Risk sharing
joint ventures
Risk reduction
GOLDEN RULES FOR RISK MANAGEMENT

Risks must be properly identified, classified and analysed before any response can be considered Do not rely on the intuitive approach or gut feelings to manage risk
The risk management process must be continuous from the moment the project starts until the moment it ends
Ensure that reporting on risks and risk sources flows correctly up the management structure A poorly defined risk structure will breed more risk
GOLDEN RULES FOR RISK MANAGEMENT

Use both a wide angled lens and a zoom to aid your vision of what could happen in the future Use both creative and negative brainstorming, dont use the ostrich approach Always have a contingency plan to cope with the worst eventuality Risk management systems should not be too complicated, they need to be integrated into a firms daily operations Problems and potential failure in a project are flagged as early as possible, cancellation possibly being allowed to avoid large costs
Flanagan & Norman 1993
BENEFITS OF RM
Increased understanding of the project More pro-active project management Greater confidence in realising objectives
Cost, Time, Quality, Safety
Increased project control over risk Improved project evaluation and review techniques Better control of uncertainty Improved project culture More effective delivery and better communication with the client Improved value for money
3. PRODUCTION PHASE
Updating of detailed plans conceived and defined during phases 1 & 2. Almost all documentation must be completed in this phase Verification of system production specifications. Beginning of production, construction and installation Final preparation and dissemination of policy and procedural documents Performance of final testing to determine adequacy of the system to do the things it is intended to do. Development of technical manuals Development of plans to support the system during the operational phase.
4. OPERATIONAL PHASE
It integrates the projects product into the existing organisation. Evaluation of the technical, social, and economic sufficiency of the project to meet actual operation conditions Provision of feedback to organisational planners concerned with developing new projects and systems Evaluation of the adequacy of supporting systems.

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PROJECT MANAGEMENT & ECONOMICS

SESSIONS 39 & 40 Contracts Risk Management

A CONTRACT IS AN AGREEMENT BETWEEN TWO OR MORE PARTIES

Project Services Contractor

Reimburs able Cost Contracts

Bills of quantities contracts

Guaranteed maximum price

Time and Materials Contracts

Direct Project Management

Project Services Contracts

Supplies certain staff to the project management team

Reimbursable Cost Contracts

Reimbursable Cost Contracts

Guaranteed maximum price

DPC DPC DPC

DPC Separate systems Integrated asset functionality

Separate activities & Systems

Equipment/Service defined (Usage uncertain)

Uncertain (not defined)

Construction EPC Detailed design Total procurement

Conceptual design EPC Consultancy

Basis for remuneration

Fixed fee Milestone Incentive

Measured work Dayrate Actual cost Incentive Actual cost+profit

Jacket Mod. Supp. Frame

Lump sum Lump sum

All plans are forecasts

All forecasts are uncertain

Risk is a measurable uncertainty, while uncertainty is an un-measurable risk

Legal liabilities:statutory liabilities, contractual liabilities Political:government intervention, sanctions, inflationary/deflationary

Financial/Commercial:inadequate inflation forecasts, incorrect

Technical: increased technology in manufacture, communications,

Health & Environmental: accidents, pollution, reduction in

Project environment as a hierarchy of sources of risk

Political Legal Commercial Environmental Force majeure

Measurable consequential costs of loss:

Indirect costs of loss:

Source Uncontrollable? Type

GOLDEN RULES FOR RISK MANAGEMENT

GOLDEN RULES FOR RISK MANAGEMENT

Flanagan & Norman 1993

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