Risk Analysis and Management- EPC Projects

Palla Narasimhudu , Larsen & toubro ltd.

The demand for scientific management in different types of projects is constantly increasing, especially for

project base organizations, Engineering, Procurement and Construction (EPC) projects have become one of the

more popular methods of project execution by both clients and contractors. Risk Management, one of the critical

concepts of project management is interesting to focus on because of its advantages and capabilities [1].

Utilization of Project Risk Management methodologies, especially in large EPC projects can lead to huge

advantages on all aspects of projects’ development. It can also be implemented as the main reference and basis

for bidding, tendering and execution (including cost, time, resource, and quality management).

By risk identification, assessment and control, probable gaps between estimated and real cost, time, and quality

of projects can be prevented or decreased. This approach also provides facilities to predict the final cost and end

dates of projects with a greater level of confidence [1].

Risk can be defined in many ways

Risk is a possibility of something that may occur in the future. It has its origins in uncertainty as on today and

has to be identified today [2]

“Risk is most commonly conceived as reflecting variation in the distribution of possible outcomes, their

likelihoods, and their subjective values” (March & Shapira 1987)[1].

Risk is defined as the possible variation in results and can be either positive or negative (Williams et al., 1998)[1]

Risk defines as the “effect of uncertainty on objectives” while “An effect is a deviation from the expected -

positive and/or negative. Objectives can have different aspects (such as financial, health and safety, and

environmental goals) and can apply at different levels (such as strategic, organization-wide, project, product and

process).Risk is often characterized by reference to potential events and consequences or a combination of these.

Risk is often expressed in terms of a combination of the consequences of an event (including changes in

circumstances) and the associated likelihood of occurrence.” - Joint Technical Committee OB-007 (Standards

Australia/Standards New Zealand, 2009)[1]

Considering the definitions above, a wide variety of risk descriptions can be found based on the circumstances

and applications. These definitions reveal two important aspects of the risk in general; uncertainty and

consequences. Therefore the occurrence probability of the risk and the severity of the effects are considered as

two major parameters of defining the risk [1]

All in all, risk is interpreted as a type of unknown event with unpleasant effects, although it can be a pleasant

happening with positive consequences which would normally be considered as an opportunity. Risk analysis

focuses on both pleasant and unpleasant aspects of the risk [2]

Profit/Loss

Problem Situation

Risk

Uncertainty

Attributed to

Chakradhar Iyyunni, Ph.D

L&T IPM

Project Risk

According to the Project Management Body of Knowledge standard, PMBOK® Guide (PMI, 2008, p.275)

project risk “is an uncertain event or condition that, if it occurs, has an effect on at least one project objective. A

risk may have one or more causes and, if it occurs, it may have one or more impacts”. A cause can be considered

as an assumption, condition, constraint, or a requirement that makes the probability of positive or negative

results, and project objectives consist of cost, time, resource, scope and quality [1]. A project is a certain type of

service which gathers different products together in order to achieve an inclusive solution. From this perspective,

projects are generally considered to have greater risk than products. Project risk is categorized separately from

financial or technical risks.

According to Mulcahy (2003) Projects risk are divided into two parts:

Static: Static risks are those who keep their characteristics during the whole project life cycle.

Dynamic: Dynamic risks can change their occurrence probability and consequences severity in the project time

span [1].

Project Risk Management Based on PMBOK® Guide (PMI, 2008, p.273), "Project Risk Management includes the processes of conducting

risk management planning, identification, analysis, response planning, and monitoring and control on a project.

The objectives of Project Risk: Management are to increase the probability and impact of positive events, and decrease the probability and

impact of negative events in the project."[1]

“It is the art and science of identifying, analysing and responding to the risk factor throughout the life of project

and in the best interest of its objectives.”[2]

Inherent Project Risk

Risks Specific to the Owner

Execution Risk

Uncertainty Risk Problem Evolution

Project Risks Evolution

Project Risk = (Probability of Events) (Consequences of Events)

Attributed to

Krishnamurthy,

Ex- Dean, L&T IPM

Applying of risk management is managing the risk effectively rather eliminating all risks in projects. Benefits of

risk management involves,

1) Systematic decision making approach and implementation

2) Probable out comes of the project

3) Outcome plan or approach to mitigate

4) Considered as a threat or opportunity ,which affects quality, time ,cost and performance of the project

5) Express the organisation’s responsibility to the clients

6) Able to withstand the competition

7) Demonstrate and enhance the successful completion of organisation record

8) Explore the techovative thinking, while face off risks.

9) To facilitate good platform for further growth of individual as well as organisation.

10) To facilitate good plat form for leaders

EPC PROJECT

EPC stands for Engineering Procurement and Construction, In EPC contracts, the contractor is responsible for

engineering and designing the project, procurement of all materials, tools and equipment and fabrication or

construction of the project, either in house or by subcontracting some work packages or some phases of the

project.

In EPC projects, total interaction of multiple agencies and multiple people working concurrently towards

common goal and transference of sharing information.

Engineering procurement and construction enterprise seen as key element participation and is critical for

delivery of project. Quality does not need more cost, but its value needs to be recognised.

The approach involves the execution of engineering and procurement activities running concurrently with

required at site deliveries timed match the schedule for efficient construction and installation.

In EPC projects, working with issues such as deadlines, controls, mission statements and submissions

combinations, along with delivery (with defined cost, time and quality by considering risks in the domain of each

contract), all in all means management, although the management of an EPC contract must be committed for all

pre-defined responsibilities (Huse, 2002).

Risks involved in EPC projects Because the dynamic and complex nature of projects, contractor carry the risk on behalf of the customer at large

extent and there is substantial amount of risk involved.

The procurement phase is allocated the highest risk in the cost distribution of an EPC project and, as such, it is

imperative to ensure accurate and correct collaborations between the engineering and procurement sectors

Ability to handle good frontline engineering, basic engineering is the key factor to optimise the cost. If it is not it

may be disaster.

EPC companies are not much value creator for shareholders, over the years it may be not attractive, if not come

up their expectations.

Owner 1. Lack of Customer Interaction

2. Failed to Financial Closure/ Crisis.

3. Change in Scope

Contractors 1. Inexperience Project Management Team

2. Lack of common practices (life cycle, planning, and so forth)

3. Ineffective project decomposition (Work Break down Structure) resulting inefficient

Plan Risk Management

Identify RisksPerform

Qualitative Risk Analysis

Perform Quantitative Risk Analysis

Plan Risk Responses

Monitor and Control risks

work flow

4. Non availability of technical, skilled and semi-skilled manpower

5. Ineffective Communication and Coordination

6. Safety

7. Competition

8. Poor Documentation

9. Poor Quality

10. Poor Cash Flow Management

11. Higher Inventory

12. Higher Interest rates

13. Environmental Controls

Government 1. Regulatory Issues

2. Policy paralysis

3. Unstable Government

4. Ineffective Co-ordination between Central and State Departments

Climatic and

Geographic

Conditions

1. Unforeseen Occurrences like Rain, cyclones, earthquake

2. Excessive Heat during Summer

3. Unusual Soil Strata

Social and

Economic

1. Anti-Social elements involvement and unethical process

2. Recession

3. Fluctuation in Currency and commodities

Shareholders 1. Low wealth creation

Risk analysing & management EPC Projects are large in nature; better data at bid stage would provide higher level of resource optimisation and

deliver better bids/bid decision. During the phases of project development by the owners/ clients and bidding by

EPC contractors, it is important to generate realistic budgets and to develop a sound execution strategy to meet

the completion requirements of the project. To understand the base cost of the project a careful bottom-up cost

estimate for procured items as well as for contracted services including various risks associated with the project

is required. Estimating project work is challenging, and most people are admitting also avoiding, probably most

significant problem of technical projects like EPC involves engineering, designing, procuring and constructing

requires interaction and integrating chain relation.

Key Contributor Unable to Complete

Critical

Scope

Schedule People

Cost Organization

Causes Effect

Changes Need Unavailable

Skills

New Technology Requires

Unanticipated Skills

Budget Cut

Task Queued Due to Resource Limits

Reorganization

Layoffs

Inadequate Notice and

Communication

Learning Curve too High

Work Delayed, Leads to Timing Conflict

Interruption

Not Ready in Time

Lost Resource

Personality Conflict

Wrong Skills

The best way of effort is the measurement made the same /similar work done erlier.Good estimates relies on:

1)Finding and using of historical data:- one’s go through the historical data, one can find out the project

analysis and lesion learnt, reference material s and engineering or other standards, published technical data and

the kind of risk level [3].

2) Experts and expert judgement: - Historical information need not be personal to be useful. Even when no

one on the project has relevant experience or data, there may be others who do, outside of project. One source

may be peers, managers, and technical talent elsewhere within organization. Another possibility is to seek out the

opinions of colleagues in professional societies who do similar work for other companies outside consultants in

technical or management fields may have useful information that they will share, for a fee. Even quotations and

proposals from service suppliers may contain useful data that you can use for estimating project work [3].

3) Delphi estimates: -Delphi is a ‘‘group intelligence’’ way to tap into subconscious historical data that would

otherwise be unavailable. It is also a collaborative team technique and contributes to group buy-in, ownership,

and motivation [3].

4) Further decomposition: -When you lack of historical data, begin by breaking the activity to be estimated into

even small pieces of work. Extrapolate from actual measurements of the portion of the work to estimate whole

activity [3].

Estimation Techniques [3]

Relevant Metrics Exist No Data Available

Prior Activity Experience Retrospectives

Databases

Parametric Formulas,

Experiential Rules (“Size”

Methods)

Life Cycle Norms

Task Owner Input

Peer Inputs

Inspections

Delphi Analysis

Short Tasks (20 Day Max)

in WBS

Further Decomposition

No Activity Experience Published Information

Vender Quotes

Expert Consultation

Guess

Get Outside Help

Use Older Technology

5) Activity sequencing: - Activity sequence requires determining the dependencies for each project activity, and

these linkages reveal many potential sources of project delay. Discovering risk arising from schedule

dependencies require all project activities to be linked both predecessor and successor activities. Critical path

method analysis is a useful technique for determining which schedule risk belonging on project risk list [90].

6) Planning horizon: -The uncertainty inherent in work planned more than a few months in the future is a

source of significant schedule risk on any lengthy project. Make specific note of any unusual, novel, or unstaffed

activities more than three months into the project. On a regular basis, include explicit activities in the project

plan to review estimates, risks, assumptions, and other project data. Risk management relies on periodic

recommendations for project plan adjustments based on the results of these reviews [96]

7) Planning procurement:-Starting before any work, specific risk permeates all aspects of the procurement

process. Procurement planning involves investigation of possible options, and requires a “make-or-buy” analysis

to determine the amount of risk involved. Determine what is most important of the project and ensure meet the

specifications that the project required and specific work on technical projects tends to evolve and change

quickly; it is challenge to evaluate potential suppliers to supply accordingly. After select a supplier, the next step

in the procurement process is to finalize the details of the work and finances. Once a selection is made, the

balance of power begins to shift from the purchaser to the supplier, which raises additional risks. When the work

begins, the project becomes dependent on the supplier for crucial, time-sensitive project deliverables. Since the

primary consideration on the supplier side is financial, the best tactic for risk management in negotiation is to

strongly align payments with achievement of specific results. Risk management also requires that at least one

member of the project team be involved with planning and contracting for outside services so that the interests of

Fishbone Diagram Analysis [3]

the project are represented throughout the procurement process. Before finalising request for proposal, one needs

gather information through other agencies; colleagues, internal business units and some other outsource to

determine the capabilities and risk taking abilities of the particular agency/out sourcing firm. Communication

throughout the process is also essential. Anything that one potential supplier finds unclear in the request for

proposal needs to be addressed [3]. In projects everything is possible, some highly influenced supplier is

definitely potential risk source for project, and management should definitely take a look. Despite best efforts,

results in terms that represent potential project problems, note these as risks. In extreme cases, may need to

reconsider selection decision

8) Engineering and Construction: - Ability to handle good frontline engineering, basic engineering is the key

factor to optimise the cost. If it is not it may be disaster. Engineering is the prime in control the project in the

scientific way. Person need not come from elite colleges, but person who having passion and dedication inside

organisation with bit training able to create great results. Early in the engineering phase a document delivery

schedule shall be developed which supports the project baseline schedule. This would enable manpower as well

as resources planning. In case the available in house resources are not sufficient to support the project execution,

utilisation of contracted resources shall be considered, as a compromise on project schedule due to resource

constraints would not be desirable. Major focus areas during engineering are speed and quality of engineering

deliverables. Hidden defects in engineering can prove extremely expensive to rectify if identified at a late stage

of the project. Delays in engineering shall be avoided by all means as this will have a knock-on-effect on the

further project execution schedule. Also, delay recovery in engineering can be easily handled compared to

recovery of delays in fabrication or construction. An established culture of fair reporting of problems, either

technical or relating to project schedules, within the EPC organisation enables the project manager to initiate

corrective actions right in time.

EPC companies needs to be concentrate. Finally construction, it is really the art of management to cope with

planning, time, schedule and cost more importantly Quality and Safety of the people because these are the only

land mark for future prospects. Project manager needs to accelerate his role to create interaction between his

team and multiple agencies for getting things done. Needs to conduct weekly, monthly and quarterly reviews and

meetings to track and monitor the progress and foreseen risks and appropriate plans to overcome. In construction

stage, whole package to brake at smallest level, tracking schedules, creating critical paths, Quality and Safety

plan develop and implementation, creating work front for resources utilisation, cost optimisation ,documentation

is the part of evidence and future controller risk and change management, managing stack holders ,legal and

regulatory issues, vertical ,horizontal and down level communication, for the coping with lack of skills

,identifying and upgrade by training ,skill training to work men for enhance the quality of product ,methodology

preparation for all activities along with risk and hazard identification and mitigation at planning and execution

stage, resource levelling, outsource resources is involving potential risk, decision making, interaction with

customers, methodology for delayed schedules ,monitoring the cost, inventory control , invoice and billing in

accordance with financial aspects, accounts receivable, accounts payable to vendors, cash inflow and out flow,

working capital management, cost control management, waste management, change management,

environmental harmony and unforeseen risk all are part of execution, every entity having potential source of risk,

inefficient risk management leads to damage the company ,human lives, machinery.

9) Project Management: An essential role during project execution is project management, which we would

foster into highlighting some important activities in the context of risk mitigation strategies. First and foremost

being the generation and freeze of the baseline schedule for which client approval shall be obtained. The baseline

schedule shall clearly define client obligations (what and when; e.g. handover of cleared site, provision of

utilities, etc.) and shall be supported by a schedule basis memorandum describing important assumptions made

for the generation of the schedule. The approved baseline schedule is not only a fundamental tool to steer the

project within the organisation of the EPC contractor but is also essential when consequences of changes have to

be evaluated. A change event in a project may lead to cost and/or schedule consequences and the latter can be

evaluated and substantiated only if the baseline schedule and regular schedule updates are available to EPC

contractor and client. In respect to changes to the project scope or schedule a frequently seen mistake during

project execution is the late notification of a change event and the late determination and documentation of its

impact on time and cost. A further important activity is the billing schedule which ideally targets a cash positive

or cash neutral project execution. As the approval of the billing schedule is often a precondition for submission

of first invoices, due attention should be given to this activity.

In the execution phase it is essential to be precise in crucial decisions and move forward to actualise the plans

rather than spending excessive time in exploring alternatives or going into R&D, as the EPC projects have

predefined boundaries of project time, cost, and quality.

A significant challenge for the project management in this phase is the coordination of the interfaces between

various engineering disciplines as well as between engineering, procurement and construction. In order to

manage this challenge the project manager shall have the full understanding of required workflows and processes

and has to align these with the schedule requirements. When the construction site nears completion the quality

and completion documentation become an issue in respect of timely generation at required quality. For an EPC

contractor it is highly recommended to keep the generation of test packs and other quality documents under tight

control or under own management.

However, with careful planning and risk management through all the phases of the project, from proposal to

completion and with due consideration of at least the described risk mitigation measures, the EPC contractors

shall be able to execute the projects within their budgets and time.

References:

[1] Amir Hassan Mohebbi, Ngadhnjim Bislimi, Project Risk Management: Methodology Development for

Engineering, Procurement and Construction Projects, Karlstads Universitet, Karlstad, Sweden, (2012), p.1,3,4

[2] Chakradhar Iyyunni, Ph.D, Risk Management to Opportunity Management, L&T Institute of Project

Management, Knowledge City, Vadodara

[3] Tom Kendrick, PMP, Identifying and Managing Project Risk, Second Edition, PHI Learning Private Limited,

Delhi, (2013) p.81, 82, 87, 90, 96, 178