42 24 29 N 20 15 50 E CIVIL GOVERNMENT SERVICES MINING & METALS OIL, GAS & CHEMICALS POWER Kosovo Motorway, Kosovo Managing Risk in Mega-EPC Projects Where Do We Start?
What is Risk? Concept: Risk A risk is an uncertain event or condition that, if it occurs, has a positive or negative effect on the business - at a project, GBU or enterprise level. Risks can be Threats or Opportunities It s the essence of business must take risks to generate returns Importance of Risk Management Every business is surrounded by risks, many of which are identifiable and manageable Differentiate between risks taken after careful judgment and those taken unwittingly The risk management framework must be robust enough to cope with unexpected risks How much risk is appropriate? Risk management is an art as well as a science Bechtel 2
Risk Management Philosophy in a Nutshell Identify and assess the risks of a proposed project comprehensively, rigorously and honestly. Do not just focus on project execution risks there are many other risks that need to be managed (third party risk, political risk, jurisdictional risks etc.) Do not just focus on contractual risks. Surface new or unusual risks early. Manage the risks of each project: Allocate and limit the risks in the prime contract Insure the risks that can be insured. Flow down appropriate risks to subs and suppliers. Build risk mitigation into the project execution plan. Price the residual risk (in contingency and fee) to balance risk and reward. Bechtel 3
A Risk Management Process Typical Model Risk Analysis Process A. Risk Identification B. Risk Assessment/Evaluation Risk Management Process C. Risk Management Strategies Avoid Avoid the Threat Forego the Opportunity Assume Informed Assumption of Threat Keep the Opportunity Reduce/Exploit Through Execution, Performance, processes, planning Transfer/Share Decline Work Funded Unfunded By Contract By Insurance (Priced Reserved) (Run the Risk) Administrative Process 2012 Bechtel 4 D. Active co-ordinated monitoring of risk and effectiveness of mitigation plans E. Claims Management F. Feedback: Learning
Bechtel 5 Importance of Managing the Risk vs. Reward Relationship
The Risk vs. Reward Relationship Business is about taking risks: Intelligently and on an informed and evaluated basis Receiving adequate reward for the risks assumed (by contract or otherwise) Developing a robust framework to cope with the unexpected Bechtel s principal ways of managing risks are: Through engineering Our execution e.g. our processes and procedures around procurement, construction and management Fair contract terms Insurance Bechtel 6 Using core competencies will enhance rewards in risk taking. Project and corporate overall success depends on effective risk management.
Allocation and Alignment of risk Allocation of risk by agreement Alignment of risk and ability to control the occurrence Alignment of risk and ability to mitigate the effects Bechtel 7
WEF Top Global Risks : 2011-2013 Probability 1 st Meteorological Catastrophes 2011 2012 2013 Severe income disparity Severe income disparity 2 nd Hydrological catastrophes Chronic fiscal imbalances Chronic fiscal imbalances 3 rd Corruption Rising greenhouse gas emissions Rising greenhouse gas emissions 4 th Biodiversity loss Cyber attacks Water supply crises 5 th Climatological catastrophes Water supply crises Mismanagement of population ageing Impact 2011 2012 2013 1 st Fiscal crises Major systemic financial failure Major systemic financial failure 2 nd Climatological catastrophes Water supply crises Water supply crises 3 rd Geopolitical conflict Food shortage crises Chronic fiscal imbalances 4 th Asset price collapse Chronic fiscal imbalances Diffusion of weapons of mass destruction 5 th Extreme energy price volatility Extreme volatility in energy and agriculture prices Failure of climate change adaption 2012 Bechtel 8 Economic Environmental Geopolitical Societal Technological
Bechtel 9 Global Risks - Categorisation
Frequency Project vs Corporate Risk - Frequency and Impact Losses Severe Losses Catastrophic Losses Facility/Project Business Line Enterprise Cost Impact Bechtel 10
Management of Risk During the Project Life Cycle Prospect screening Prospect approval Submission of proposal Identification Partners Subcontractors Shaping the deal The deal Risk flow down Risk transfer PERM Risk analysis Execution methods ES&H Contract signed Engineering and construction commenced Other works/client changes Financial management Project close out Warranties Latent liabilities Construction completed/signoff Insurance claims/financial recovery/ wrap-up 2012 Bechtel 11
Corporate Risk Management Strategies for Catastrophic Exposures Contractual Allocation Insurance Corporate Architecture? Bechtel 12
Project Insurances Liability CGL/TPL Builders Risk (CAR) Worker s compensation Employer s liability Construction equipment Professional liability/indemnity Contractors pollution liability Marine cargo Aircraft liability Marine liability Railroad protective Etc.. Bechtel 13
OCIPs and CCIPs (Wrap Ups) Different terms, different meanings Typical structure vs wrap up Does it matter which party arranges? What are the drivers for the wrap up? Loss funds Contract issues wrap up manuals Bechtel 14
Pricing. Coverage, Service Variables Service (claims) Insurance Variables... Coverage Price November 1, 2012 Risk Management and Insurance 15