Risk on complex_projects_project_auditors

Risk on Complex Projects: A case study

PRJ05

Joy Gumz, CPA, CISA, PMP Project Auditors, LLC

“PMI” is a registered trade and service mark of the Project Management Institute, Inc. ©2012 Project Auditors LLC All rights reserved

“PMI” is a registered trade and service mark of the Project Management Institute, Inc. ©2012 Project Auditors LLC

AGENDA

•  Format of this session: case study

•  Case study details

•  Audience decision questions & discussion

•  Q&A / wrap-up

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Objectives

•  Better identify risks, both positive and negative, in the procurement phase

•  Define contractual clauses that may reduce complex project risk

•  Understand importance of risk management during initiation and planning of the procurement phase

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About Project Auditors LLC

•  Professional consulting, training and auditing firm –  Professionals certified in accounting, audit & PM

•  Experts in project controls: preventative & detective

•  Providing assessments, audits and reviews –  Construction & Engineering Projects –  Oil & Gas Projects –  ICT (Information Communications Technology)


A few clients

See more at our website: http://www.projectauditors.com


Format of this session: Case Study •  NASA Methodology

•  Published by Chief Knowledge Officer

•  Decision-oriented case study •  You will be a main character

who will eventually make decisions •  You’ll be provided with

data that was available at time of the event

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An effective case study

Source: NASA Case Study Methodology

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•  Does NOT have just one answer

•  Fosters decision making

•  Generates questions


Audience participation - A few questions

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1  Does anyone work in the oil & gas industry?

2  Is anyone a

risk manager?


Causes for underperformance

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*Poor plan/bidding/estimating

*Bid/Tender evaluation

Owner intervention

Design changes

Poor PM / governance

Poor team performance

* Subcontractor performance

Labor / commodity escalation

* Inappropriate contract vehicle


Oil Refinery Program Background

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Influence

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•  Industrial process plant –  Every refinery is unique –  Expensive to build and operate –  Tolerances fine to produce high quality products

•  Take advantage of –  Arabian crude capacity –  Infrastructure in Jubail industrial city 2 complex –  Proximity to potential petrochemical customers

and port facilities


Project Objectives

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•  Full conversion refinery –  Ultra low sulphur gasoline and diesel fuel products –  Process Arabian heavy crude feedstock

•  Within budget

•  Provide petrochemicals for Jubail complex –  Paraxylene, benzene, polymer grade propylene


Joint Venture Partners

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62.5%

37.5%


Key Stakeholders

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•  Saudi Aramco and Total executives, SATORP employees and contractors

•  Saud Royal Family

•  Royal Commission

•  Tenants in the Jubail 2 industrial complex


Cost and Financing

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A 400,000 bpd (barrels per day) refinery costs around 30 billion yuan ($4.4 billion) in China, but would require 50 billion yuan investment ($7.3 billion) in Saudi Arabia.”

Sinopec Corp Chairman Su Shulin. (May 18 2010)

Expected financing from:

* Import-export banks

* Saudi Public Investment Fund

* Commercial banks

* Saudi Aramco


Projects Delivered over Original bid: Contractor’s view

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Market and economic conditions

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The increasing size and complexity of projects has led to a growing reliance on contractors’ capabilities and project management skills. Infrastructure Today and E&Y Report, 2011

A soft EPC market will deliver

“comfortable” prices.

EPCs will concentrate on their core competencies, prudently select projects and focus on growth of profitability rather than order book.


Future Competitive Position

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Source: Wood MacKenzie


Some procurement risks (owner)

•  Project delivery method may not be optimum

•  Contract prices may be over planned budget

•  Contract clauses missing or will not drive desired behaviour –  Conflict among contractors rather than teamwork

and coordination

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Your role: Program risk engineer

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•  Key Responsibilities –  Provide assurance that high level risks and

opportunities are recognized, effectively assessed and managed

–  Ensure mitigations are developed, tracked and implemented to reduce risk to acceptable levels

–  Engage functional groups in cross discipline discussion on key risk areas and provide support

–  Provide overall policy advice on risk management


Procurement (you are in this phase)

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•  Contracting strategy –  Overall project delivery structure

•  Use of a prime contractor •  Number of packages •  Lump sum

•  Drafting of contracts


PMT: the project management team will control, manage and co-ordinate the project from conception to completion

Project management team - owner

Package 1 Package 2 Package 3 Package 4 etc

PMT – Owner staff


  Disadvantages

•  No single point of accountability

•  Potential for increase in costs if lump sum contracts are not used or change are not controlled

•  Owner assumes overall cost risk

•  Considerable reliance on the project manager and PMT staff

  Advantages

•  Allow for fast tracking •  Flexibility •  Owner retains control •  Project Manager provides overall

budget & control

PMT (internal) – owner’s perspective


  Disadvantages Cost •  Difficulty of comparing tender prices

of different designs

Design Process •  Design approval process has to be

carefully managed •  Owner’s requirements: often

performance based, less prescriptive

Quality •  Less prescriptive specifications plus

lump sum pricing may drive ‘lowest permitted quality’ attitude

  Advantages Risk •  Single point of responsibility for the

EPC scope of work – fitness for purpose and defect warranties

Quality •  IF one EPC, design likely to take full

account of buildability issues

Cost •  Price control - usually lump sum

Time •  Accelerate start of construction by

overlapping the design and construction process

EPC – owner’s perspective

EPC = Engineer, Procure and Construct


  Disadvantages

•  No single point of accountability

•  Limited warranties from EPCM contractor

•  Does not provide cost or time certainty

•  Requires substantial management effort by the EPCM contractor and significant overview responsibility by the Owner

  Advantages

•  Enables design streams to be worked up concurrently

•  Enables packaging of contracts by trade, skills or other capabilities where a single contractor entity does not have the capability to deliver the entire project

•  Less “risk contingency” than EPC

EPCM – owner’s perspective


List of Packages

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Project Status and Timeline

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June, Year 1 Award of contracts Jan Year 2, Start Construction March 1, Year 3 15% Equipment on site July, Year 3 60% equipment and 30% piping | Spools Oct 1, Year 3 1st commissioning Dec Year 3 90% equipment 50% piping Spools May 31, Year 4 Final Commissioning Oct 31, Year 4, Final Startup


Simple Risk Matrix – 5 x 5

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Questions and Discussion

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Your next steps

•  What advice would you provide?

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What should we do now?


Audience questions

1  Project Delivery: Owner PMT with multiple EPCs

2  Re-tender – or not?

3  Number of packages – any suggestions?

4  Contractual clauses – any suggestions?

5  Other suggestions to reduce risk at this time?

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Possible contractual clauses

•  Contractor risk management

•  Right to audit

•  Schedule and WBS –  Interim and full project –  Levels and due dates

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Wrap-up: An effective case study

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•  Generates more questions than answers •  Leaves important issues unresolved •  Allows for multiple levels of analysis •  Captures a tension between courses of action •  Fosters decision-making thinking


Risk Quantification Matrix

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Contact Information

•  Name: Joy Gumz, CPA, CISA, PMP

•  Email: [email protected]

•  Phone: +1.949.452.0578

•  http://www.projectauditors.com

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Your wrap-up

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